How To Easily Make Cash Flow From Stocks
One of the things that makes the Rich Dad way so different from other financial educators is that we do not tell you what to buy or what to invest in.
Real estate may be a good fit for many investors but it’s not a great fit for all investors. Stocks may make a lot of sense to most people, but certainly not all. A good investment vehicle (stocks, real estate, business, commodities) needs to fit with your lifestyle, personality, philosophies.
Most people believe that stock investing is at odds with the Rich Dad philosophy of investing for cash flow. The reason people believe this is because they think stocks are simply buying low and selling high. An educated stock investor knows how to cash flow with the stock market, not just invest for capital gains.
Three Reasons Why Cash Flow Is Better Than Capital Gains
- It is resilient from market swings and market chaos.
- It brings money into your pocket on a regular basis (not imaginary “paper wealth” such as net worth)
- It is generally taxed at a lower rate.
We’ll go over two ways that you can invest in stocks and follow the Rich Dad philosophy of cash flow.
The first method of dividends is pretty direct. The second method of covered calls requires quite a bit more financial education.
The NASDAQ website says this about dividends:
At its core, a dividend is your share in the profits of a company you own […] In return for purchasing stock, or investing in, a company you are given two basic rights. First, you have the right to participate in electing a board of directors to run the company, and second you have the right to be paid a share of the company’s profits, at the discretion of that board. This is paid in the form of a dividend. When the board of directors releases company results at the end of each quarter, they will also announce the amount of dividend (if any) to be paid per share. Thus, if a company declares a $0.50 dividend for a given quarter and you own 100 shares, you will receive $50.
So, if you were to buy stocks that pay regular dividends, then you are purchasing assets that add to your cash flow. With enough assets like this, you can eventually have the income to do whatever you like, right now or in retirement.
Covered Call Cash Flow
The covered call strategy is not for the uneducated. This is going to get a bit crazy. But once you get it, it’s very exciting!
Now, let’s explain cash flowing a covered call (a stock option): A stock option is a promise by someone to sell a certain stock at an agreed-upon price until a certain date. In return for this promise, he receives a premium as income. This premium is not just based on the movement of the stock price, but on the movement of time.
Stock options can be confusing so I’m going to use an example as it relates to real estate. Let’s suppose that you are a landlord who owns a house. You find a family to buy the house, but they don’t want to buy it outright today. Instead, they decide to lease the house for three years with the option to purchase the house at an agreed-upon price at the end of the lease term. While you are waiting for the lease to expire, you are earning money on the movement of time (rent).
As the owner of a lease-to-own house, you will make money no matter what happens. It doesn’t matter if the value of the house increases or decreases. If the house increases in value beyond the agreed-upon price, the family got a good deal but you still got what you wanted since you set the price.
If the house goes down in value, the family will likely not buy the house at the end of the lease and you get to keep the house.
Now you can go out and lease-to-own the house again. While not exactly the same (you don’t receive payments during the term of the option contract), you now have a general idea of how a stock option works:
- You own Stock XYZ
- You sell an Option to buy Stock XYZ after a predetermined amount of time at an agreed-upon price
- At the expiration of the term, you receive the option premium.
- You either sell Stock XYZ at the agreed price or you retain ownership