15 Assets That Generate Cash Flow

Only a few asset classes can beat the cash flow generation abilities of dividend-paying securities. In this article, we’ll look at different income-producing investments to see which fits your portfolio needs the best.

Dividend-Paying Stocks

Usually, successful income investing starts with a well-diversified portfolio of profitable dividend stocks, featuring both reliable, well-established, cash-paying companies and a smattering of more speculative, high-yield growth firms to balance out the risk profile. 

But experienced income investors also know that the power of a dividend stock lies in its ability to compound returns over time. Ensuring that a company can keep on making its payout for many years to come is crucial, and failing to carry out due diligence on the health of a given stock can lead to disaster over the long term.

One way to virtually guarantee you are picking the best dividend stock is to look at a company’s fundamental financial metrics. In addition to studying its dividend yield, it’s essential to look at a firm’s dividend payout ratio, its debt load, earnings, and cash flow, and the company’s dividend coverage ratio too. Doing this will protect you from falling into the so-called “dividend trap.”

One such stock that ticks most of these boxes is Clearway Energy (CWEN), a renewable energy infrastructure company operating mainly in and throughout North America. The business generates a good interest rate-beating dividend yield of 3.59% — which it increased to $0.34 per share in the last quarter — and which is well-covered by its trailing 12-month cash dividend payout ratio of just 33%.

Its forward operating cash flow growth is high for its sector at 32% and should ensure the company has sufficient funds to meet its dividend obligations in the future.

Furthermore, the company has operations nicely diversified across 40 assets. Its purchase agreements have long expiration dates, most going well into the 2030s and 2040s, securing its cash flow visibility for decades to come. Clearway’s gross profit is also high at 66%.

However, to provide a counterpoint to this bullish dividend thesis, it’s important to point out that CWEN does carry a high net debt-to-EBITDA ratio of 9.78, something that could cause problems if the business were to suffer a setback in the future and its focus was to turn to paying off debt instead of funding its dividend payout. But, taken in the round, Clearway Energy is the kind of company most investors should seek to have as part of their dividend stock portfolio.

Master Limited Partnerships

Combining the liquidity of a publicly-traded stock with the tax breaks of a limited partnership, master limited partnerships (MLPs) are novel investment vehicles that offer low-risk opportunities for generating steady, long-term income streams. 

MLPs pay a “distribution” to their partners, like a kind of tax-free dividend, which is tied to its distributable cash flow, a metric analogous to a stock company’s free cash flow. This distribution is not as liable to tax as a regular dividend, meaning investors can enjoy larger cash payments as a result. 

MLPs are so tax-efficient that their use has narrowed to apply only to real estate and oil and gas businesses. If indeed it is one, their major drawback is that individual investors can face a complicated tax return at the end of every year.

One of the best MLPs on the market is Magellan Midstream Partners (MMP), a high-yield midstream business with plenty of revenue opportunities and commodity diversification. The enterprise is involved with almost half of the refining capacity of the United States, and it manages 10,000 miles of pipeline with nearly 50 million barrels in storage.

For investors, this MLP is amost a sure-fire bet. In 2020 alone, MMP returned roughly $1.2 billion to unit-holders by way of dividends and buybacks and did so when the health crisis was at its peak.

Furthermore, its distribution has grown from less than $1 in 2001 to its $4.11 per share predicted for 2021. Magellan also either increased or maintained its payout every year it has been in operation, and it is one of the most conservatively run midstream businesses out there. Its low debt-to-EBITDA ratio of ~3.9 makes it a very safe play going forward.

Exchange-Traded Funds 

Exchange-traded funds (ETFs) are a popular way for investors to gain exposure to a wide variety of stocks and other asset classes while saving on the high commission fees they would pay if they bought the same securities individually.

Many ETFs specialize in just one particular industrial sector or geographical region, such as the SPDR S&P Kensho Smart Mobility ETF (HAIL), which focuses on the transportation business — especially the electric vehicle and commercial drone market.

However, plenty of ETFs center around income-generating stocks, seeking to offer investors quality dividend returns. Some dividend ETFs lean toward stable, less-risky companies, including blue chips and Dividend Aristocrat firms. In contrast, others provide exposure to higher-yielding companies that are not as well established and are potentially more unsafe.

Unlike mutual funds, which are often managed by professionals and have higher fees, ETFs typically offer cheaper expense ratios because they are usually not as actively managed. Depending on the exact dividend ETF you choose to invest in, these investment vehicles are an excellent way to balance the overall risk profile of your broader portfolio.

For investors looking for a high-yield dividend ETF — and who also don’t mind paying a little more on management fees — the QRAFT Al-Enhanced U.S. Large Cap Momentum ETF (AMOM) might be just what they want.

With an annual dividend yield of 19.94% and an expense ratio of 0.75%, this actively managed ETF targets large-cap stocks with high price momentum in a bid to generate significant returns in a short space of time. The fund uses an AI-powered deep reinforcement learning model to inform its stock picks, and it is already up nearly 16% so far this year.

Those seeing a more risk-averse dividend ETF could do worse than the JPMorgan Equity Premium Income ETF (JEPI). Its fees of just 0.35% and an annual yield of 7.11% offer a lower-volatility option for the equity markets.

The ETF is in the top-yielding 1% of all U.S.-registered funds and delivers a reliable monthly distributable income.

Mutual Funds

As well as dividend-yielding ETFs, there are also dividend-yielding mutual funds too. Mutual funds differ from ETFs in that they are usually less liquid due to being traded only once per day on the stock exchanges, and they can carry higher management expense ratios.

Rather than just tracking an index like an ETF would, mutual funds are typically actively managed, meaning that investors have to pay fees for the work done by analysts and researchers, which can be pretty pricey. However, the benefit of sticking with a mutual fund is that the investor can gain exposure to more niche market opportunities, which in many cases can offer the potential for much higher rewards.

The Vanguard Dividend Growth Fund (VDIGX) is a mutual fund that looks for undervalued large-cap companies that can drive high earnings growth and a track record for making regular dividend payouts and also show a willingness to increase those dividends over time. The fund has a meager expense ratio of 0.26% and an average one-year annual return of 34.78%.

Suppose investors prefer the idea of a mutual fund that pays its dividend out on a more regular monthly basis and want a portfolio biased toward higher dividend-paying stocks. In that case, the Federated Strategic Value Dividend Fund (SVAAX) is worth a try. It comes with higher fees of 1.06% and includes Chevron (CVX) and Exxon Mobil (XOM) as its two top holdings.

Alternative Investments

If you don’t fancy going the traditional route of income generation, there’s always the alternative option with groups like Yieldstreet and others. Yieldstreet is an investment group that promises to open access to investment opportunities to which everyday individuals have previously been denied.

In practice, Yieldstreet offers users a pretty eclectic sampling of investment products, from an art equity fund to its supply chain financing programs. Yieldstreet’s team of experts vets all investments.

Suppose users don’t want to build their custom portfolio. In that case, Yieldstreet has its Yieldstreet Prism Fund that pays a regular quarterly distribution from a single investment that includes assets from the Real Estate, Legal, Marine, and Commercial sectors. 

Another company offering access to private market assets is DiversyFund, a real estate specialist that provides investors with the opportunity to invest in its Growth REIT fund.

The fund is a public non-traded REIT open to all U.S. residents, with a targeted internal rate of return of between 10% and 20% for each of the multifamily real estate properties that it owns. The project aims to create a fully automated, 100% online investing experience with no net worth restrictions. 

Real Estate Investment Trusts

Self-Managed Real Estate

If your funds permit it, investing in your own self-managed real estate portfolio might be an option when it comes to generating property income too. You don’t even need to start with a suite of properties either; just one rental property can turn out to be a lucrative investment if handled well.

 

However, becoming a landlord can be a culture shock for many people, as the job requires a full stack of particular skills and a certain kind of sentiment. Moreover, future real estate moguls should be aware of the pitfalls of renting out property on a professional basis, as the financing for rental properties can be significantly different to that of buying your own residential property.

 

One of the most critical aspects of the self-managed real estate game is figuring out the opportunity costs of purchasing a rental property and the margins that will be involved. The decision to either buy a property outright or finance it on credit can make a big difference to the annual rate of return on the investment, as does the interest rate that you secure on any mortgages or other credit lines. 

 

Source: Unsplash

Crowdfunding Real Estate

Another way to gain exposure to the real estate sector is by investing in crowdfunding ventures, such as Fundrise.

This approach brings together the buying power of interested investors and melds it with the expertise and network potential of real estate specialists.

 

In particular, Fundrise takes on a value investing mindset when it comes to acquiring property assets and implements a conservative strategy so as to withstand any unforeseen downturns in the market.

 

Fundrise has built a diverse portfolio, ranging not just from commercial to residential properties, but also featuring the kinds of investment securities found in mortgage REITs too, such as debt and equity products. The private real estate sector has tended to outperform the more traditional portfolios of large-cap stocks and bonds over the last 20 years, bringing in more annual income and higher returns but with lower volatility. 

 

Depending on your budget, Fundrise offers a number of different investment accounts with various features, with its Starter account requiring an initial investment of just $10.

 

There are other real estate crowdsourcing companies too, such as CrowdStreet, which works in a similar way to Fundrise but allows investors to invest in individual property deals instead of across just one general portfolio, with some CrowdStreet properties having targeted cash yields as high as 10 percent. CrowdStreet also has a number of diversified funds and offers an educational and advisory service too.

 

Being a fairly new kind of investment vehicle, the risks of crowd-funded real estate ventures can be quite high. The high internal rates of return on crowd-sourced property deals are often predicated on the basis that the companies can add value to their projects through renovation and other initiatives, which carry with them an execution risk.

 

They are also far less liquid than a typical REIT, which means investors’ money can be tied up for months or years before property can be sold and its profits realized.

 

Peer-to-Peer Lending

One of the leading methods of alternative personal financing is peer-to-peer lending (P2P). Sometimes known as social lending, P2P connects borrowers with lenders on platforms such as Prosper, StreetShares and Peerform, where interest rates and the terms of service can vary greatly from traditional forms of credit lending.

 

P2P began around 2005 as a way to provide lending services for people who were usually locked-out of conventional lending institutions. However, the practice grew in popularity and the industry now has tailored products serving many facets of the credit sector.

 

The advantage P2P for lenders is obvious – the rate at which loans can be agreed is many percentage points above that which a bank offers in cash deposits.

 

The case is similar for borrowers too; the cost advantages of dealing directly with another individual means that cash savings can be made across the board, from lower fees to lower interest rates too. 

 

However, there are certainly a few issues that lenders must be aware of before jumping into P2P lending. The first is the fact that, in general, most losses from defaults are not insured. This makes them highly risky and, while borrowers are still assessed for creditworthiness, they can and often are, individuals that other credit lenders have decided to shy away from.

 

Secondly, lending platforms differ in how they allocate your money and you might not always have that high interest rate that you were hoping for. Furthermore, there’s also the risk that a P2P firm could go bust – taking all your investment capital and future returns along with it. Given the history of credit cycles, this is a very real hazard.

 

Bonds, Notes and Treasuries

Fixed income investments like Treasury bonds and notes are among the safest – if not the safest – investments in the world. Guaranteed and underwritten by the U.S. government itself, Treasuries might not be the highest-yielding instruments out there, but they’ll give you peace of mind – and a modest interest rate payment – for many years to come.

 

The difference between a Treasury bond, bill and note is simply the length of time until it reaches maturity, ranging from less than a year for a Treasury bill to 30 years for a bond. Once bought, a Treasury can be sold anytime before maturation date, making them highly liquid assets.

 

Investors seeking a steady income will be attracted to Treasury bonds, with their risk-free nature making them a good long-term hold. However, T-bonds have a very low rate of return and are exposed to significant inflation risk. In fact, Treasury notes often yield an overall lower return than the rate of inflation itself. 

 

There’s also the risk that interest rates can grow faster than a bond’s fixed interest rate too, making a previously acquired bond worth less than one bought at the present day’s higher rate. And selling a bond might not help here either; there’s no guarantee that a bond will be sold before its maturity date for more than was initially paid for it – the principal is only guaranteed if the bond is held until maturity.

 

Covered Calls

Selling covered calls is a conservative strategy for generating portfolio income and lowering risk from long positions held in an underlying asset. The strategy relies on taking profits from the option premium of a call contract and should only be employed when the price movement of the security is expected to move little in the short-term.

 

When an investor writes a covered call, they give away their right to sell their stock at any point in time for the current market price. Conversely, the buyer of the call obtains this right, giving them the opportunity to buy the asset on or before the contract’s expiration date at the strike price agreed on when the option is exchanged.

 

The benefits of selling a covered call are two-fold:

1. the writer receives the option premium for the covered call, which they keep whether or not the option is exercised in the future. If the value of the asset moves up to the strike price, the seller gains from the appreciation in price due to already owning the stock in question.
2. Moreover, the seller of a covered call can also benefit in a second scenario, this time where the price of an underlying security falls. In this case, the writer of the option minimizes their downside risk to the tune of the premium cost, insuring the seller against a small, short-term loss of value in the stock.

While covered calls are effective in less volatile markets, they are not so beneficial in more bullish or bearish environments. For instance, if an asset drops precipitously in value, the investor stands to lose a lot of money, and the option is worthless as a hedge on this occasion.

 

Alternatively, if a stock rises above the strike price of a contract, the investor again stands to lose as the option will be executed – and the shares sold – and the investor loses out on a cash bonanza.

 

Selling Puts

Selling puts can seem somewhat riskier than writing covered calls, since the profits available from writing puts is limited to the price of the premium when sold, whereas the potential losses should the underlying security drop below the strike price can be fairly substantial.

 

However, there are some good reasons for selling puts in certain circumstances. To begin with, when an investor writes a put option, they receive the contract premium upfront – just like when selling covered calls – and they get to keep this money regardless of whether the contract is exercised or not.

 

In the example of selling puts, an investor agrees to buy a portion of stock at a given strike price, and so the ideal situation for them is for the asset price to remain stable for the length of the contract. If the security falls in value, the investor will be forced to buy the asset at a price higher than its current market worth.

 

Another reason to sell puts is that it allows investors the opportunity to open up a long position in a stock that they intended to buy anyway, with the possibility of getting the stock at a cheaper price than its present value. In this example, the investor would write a put contract at the strike price they would like to buy the stock.

 

This way the writer gets the premium for the option, while also the possibility of getting the stock at a cheaper price than it’s currently worth.

 

If the price of the stock then falls below the strike price, the investor is still able to get the shares at the strike price, but at a lower net cost due to the money received from the premium. However, if the option is never exercised because the value of the security remains above the strike price, the writer does not have to buy at the inflated value, but still keeps the profits from selling the premium.

 

This scenario can iterate many times over, bringing in a healthy profit for the put writer on multiple, consecutive occasions.

 

Certificates of Deposit

Banks and financial institutions offer a plethora of savings products to customers, some promising high rates of interest with a large dose of risk attached, others much less risky but with lower returns to match.

 

Sitting somewhere in the middle of these two extremes are certificates of deposit (CDs), an extremely safe investment vehicle that lets you place funds into a bank’s deposit account for a fixed length of time with a fixed rate of interest. The term limit, or length of time you leave funds in deposit, can vary, and, in general, the longer the term, the higher the rate of interest you will get.

 

CDs are an excellent choice for people who want a safe, government insured savings scheme that delivers a monthly or quarterly income with the power to compound over the duration of the investment.

 

Certificates of deposit almost always have an interest rate higher than a bank’s typical checking or savings account, and are far less susceptible to market volatility and swings. 

 

There are a few factors to consider before opening a CD account, however, especially when it comes to getting the best interest rate. And, while the longer you’re willing to put your money away for the higher the interest paid, that’s not the only thing to be aware of. For instance, it’s best not to open a new CD right before an anticipated rate hike, as this could limit the returns you receive, whereas doing so before rates are decreased would work out more in your favor.

 

Source: Unsplash

Renting Out Your Car 

Ride-hailing schemes have become more and more popular recently as concerns around environmental issues – and the wider green agenda – have pushed themselves to the forefront of many people’s minds. With car emissions being credited as the biggest factor contributing to global climate change, it’s no wonder that any effort to cut down on the number of cars on the road would be highly sought after.

 

And now, with a variety of car-sharing firms in operation, anyone with a motor vehicle lying idle on the curbside can help towards making this effort a reality. Simply by listing your vehicle with one of the many online car sharing marketplaces out there, car owners can generate passive income by renting out their unused automobiles to eager guests.

 

Turo, for instance, lets vehicle owners customize their daily rental rates, and hire rules, to suit their own particular needs, and offers liability insurance and physical damage protection as part of its service.

 

Some car-sharing businesses even specialize in renting out your vehicle to customers who will use your car to work for popular ride-share platforms like Lyft (LYFT) and Uber (UBER).

 

The benefit here is that you might be able to demand a higher rental fee, but the drawbacks come with some glaring policy limitations that might make the enterprise more risky and less profitable over the long-term.

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.