Investment Strategies & How to Generate Cash Flow

Schwab Intelligent Portfolios offers you a choice among three investment strategies: Global, U.S. Focused and Income Focused. Each strategy provides access to a well-diversified portfolio of stocks, bonds and cash based on your investment goal, time horizon and comfort level with risk. And, each strategy can be a suitable way to achieve your financial goals, whether you are early in your career, saving for retirement or ready to enjoy your time in the sun.

In most situations, when you purchase an investment or security, your money can grow in two ways: (1) periodic payments in the form of either dividends (from stocks) or interest (from bonds) and (2) a change in value when you sell the security. The former is typically referred to as "yield" and, together, both are called "total return." If it helps, think of owning a rental property—you might receive monthly rental income (yield) from leasing the property to a tenant and, when you go to sell the property, its market value may have increased since the time that you bought it (price return).

Academic theory tells us that a stock's price reflects all the expected future cash flows to shareholders. Therefore, there is a counterbalance between yield and price return: if cash is paid today in the form of a dividend, you might expect the market price of the stock to fall. Schwab Intelligent Portfolios believes it's less important to focus on the yield of your investments and more important to focus on an investment's total return.

All else equal, we understand why some investors may have a preference for more predictable sources of return, like dividend and interest payments.¹ The Income-focused strategies include allocations to underlying securities or companies that pay out a higher percentage of their earnings or total return in the form of interest or dividends. But the Global strategies make interest and dividend payments, too.

The difference is that the composition between yield and price return are different for each strategy, with a higher percentage of the Income-focused strategy's total return coming from yield and a lower percentage of the total return coming from an expected increase in value.

If you are nearing or in retirement, you are likely most concerned with the "income" (cash flow) that can be drawn from your portfolio. You might also think that if you need cash flow, you should be invested in an Income-focused strategy. This isn't 100% correct. In fact, any of our investment strategies may be appropriate for someone in retirement. And, depending on your financial situation and preferences, the Income-focused strategy may be appropriate even if you aren't yet in retirement.

Here, it's important to distinguish between an investment strategy, and the cash flow that can be generated from an investment strategy. While dividend and interest payments are one source of cash flow, it can be generated several ways—the most obvious and easiest being from cash reserves held in the account. Proceeds from the sale of securities is another very common way to generate cash flow from retirement savings and can be advantageous from a tax perspective.²

The process to generate cash flow when you need it can be difficult and tedious, especially if your desire is to keep your savings invested and working for you while you are withdrawing (and it should be). The first question to ask yourself is: How much do you need and how much can your savings and investments support? Then it's a question of how and from where? Which accounts and which positions or securities? Drawing down cash will not only deplete your cash reserve but will make your remaining portfolio more aggressive.

Decisions about whether to reinvest interest or dividend payments and which securities or positions to sell have both investment and tax implications. It's easy to get overwhelmed. Schwab Intelligent Income was designed to help and to automate these decisions for you—providing tax-smart withdrawals (across any number of enrolled Schwab Intelligent Portfolios accounts) to support "income" (cash flow) needs while keeping your portfolio well-diversified and invested according to your risk profile.³ Many may be accustomed to what we would call a "dividends and interest only" method of generating cash flow. For most, dividend and interest payments are unlikely to cover income needs on their own. Schwab Intelligent Income is more than just dividends and interest payments and will sell securities and rebalance your investments, as needed, to keep you on track to meet your retirement goals.

Schwab Intelligent Portfolios offers investment strategies that can be tailored to your goals, risk tolerance, time horizon, and investment preferences. While there are some notable differences between the underlying holdings of the strategies and source and the composition of your investment return, each provides similar risk and return characteristics and has the horsepower to help achieve your goals. And, when the time comes to turn those investments into a recurring stream of cash flow, Schwab Intelligent Income is here to help.