Making stocks a part of your portfolio can be a smart move, especially if you are investing with long-term money. But while stocks are primarily a long-term investment, you can also use those stock holdings to generate current cash flow in the form of dividends, and in the form of pass-through payments from your stock mutual funds.
One of the best ways to generate current cash flow from a stock portfolio is to invest in dividend paying stocks. Many large blue chip companies pay handsome dividends to their shareholders. If you buy your stocks through a broker, you can request that any dividend payments be transferred directly to your bank account, providing you with a steady stream of income you can use to meet current living expenses. Many retirees use this strategy to supplement their Social Security, pensions and other sources of income.
You can receive your payment when you sell your shares of stock, but it is generally not a good idea to invest in individual stocks purely for current income. Stocks can be extremely volatile in the short term, and if you need the money you could end up selling your stock at a loss simply to generate current cash flow. But if you have a stock that has gone up in value since you bought it, you can sell it and lock in your profit.
If you choose to hold your stocks through mutual funds, those funds will generate a certain amount of capital gains each year, as well as dividend income. The amount of capital gains and dividend income will vary from fund to fund, so if you are invested primarily for current cash flow you will need to evaluate the yield on each fund. You can find current yield information in the fund prospectus and the annual report.
Reinvested vs. Paid Out
When you invest in a mutual fund, you need to answer a number of questions on the applications. One of those questions concerns the payment options for capital gains and dividend income generated by the fund. You can choose to have that income paid out to you and either held in a money market account or transferred to your bank, or you can choose to have that income reinvested in additional shares. If you decide you need the income, you can change your selection to have those dividends and capital gains transferred to your bank each month.
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