Investing 101—Cash flow in retirement

January 27, 2021
Shawn P. Messonnier, DVM

Shawn P. Messonnier, DVM, owns Paws & Claws Holistic Animal Hospital in Plano, Texas, and serves on the dvm360 Editorial Advisory Board. He has written multiple books on marketing as well as holistic veterinary medicine.

Vetted, Vetted February 2021, Volume 17, Issue 2

Dividend stocks and closed-end funds can help ensure a financially secure retirement. Here are the basics on these investment types.

Although many VettedTM readers are in the accumulation phase of their investment lives, others, like me, are planning to retire sometime during the next decade. We need the continued growth of some of our investments in retirement to outpace inflation, but the goal of investing for and in retirement is to produce enough cash flow to sustain your standard of living.

I have many mentors in the investing space, but by no means am I a financial planner, nor do I have all the answers (hence the need for mentors). However, I do see the results of my learning as I watch my cash flow increase, and I am confident that my needs in retirement will be met. My goal in writing this article is to provide fodder for your next discussion with your financial planner. (If you do not have a financial planner, you should consider getting one.)

Cash flow in retirement can come from a variety of sources. The 2 discussed in this article—dividend-paying stocks and closed-end funds (CEFs)—are suitable for investors of any age.

Dividend stocks

A stock is an investment that represents partial ownership in a company (see Investing glossary sidebar). Dividend stocks pay cash—usually monthly, quarterly, biannually, or annually—in the form of dividends. These companies tend to be profitable and share their profits with all of their stockholders.

Although it fluctuates daily, the average dividend for companies in the S&P 500 Index is about 2%.1 This means that for every $100,000 invested in an S&P 500 mutual fund, the investor will earn $2000 annually in dividends. (Capital gains, or the profits from shares of a stock or other asset, are a different type of return and averaged 13.99% during the last decade; over 20 years they have averaged 6.41% and are “expected” to range from 6% to 8% for the next 10 years.) If you do not want to do a lot of work investigating individual stocks, then investing in mutual funds (especially those of dividend payers) or CEFs is the way to go.

However, you can also invest in individual stocks. Choosing the best stocks can rely on timing and is often a hit or miss, even among experts. Increasing the number of dividend stocks in which you invest to 50 to 100 in a variety of industries/sectors minimizes both the risk of losing principal and the chance that too many of your stocks will suffer dividend cuts or suspensions, as we have seen with the coronavirus disease 2019 pandemic.

Regardless of how you choose to invest in dividend stocks, the returns serve as a source of reliable (although not guaranteed) cash flow. There are no guarantees when it comes to cash flow, but dividend stocks tend to bring greater cash flow than cash, certificates of deposit, or bonds—although bonds and bond funds can also provide cash flow and help balance the risk of a retirement portfolio.

Closed-end funds

A CEF—also known as a closed-end investment or closed-end mutual fund—is a portfolio of pooled assets that raises capital only once, through an initial public offering, and then lists shares for trade on a stock exchange. As with many mutual funds, a professional fund manager oversees CEFs but they do not issue or redeem shares daily as is the case with mutual funds. A CEF portfolio is typically focused on a narrower subset of securities, such as a specific industry or market sector, which makes them more subject to volatility.

A CEF trades like a stock—on a stock exchange or over the counter—whereas an open-end mutual fund is bought and sold directly with the fund company or a brokerage firm.

Cash is earned by the CEF investor in 2 ways: cash flow (represented as yield on the fund, paid monthly, quarterly, biannually, or annually) and growth of the share price (capital gains similar to stocks and mutual funds). The yield is what makes these funds so appealing to retirement investors and averages 6.73%, quite a bit higher than the S&P 500.2 So, for every $100,000 invested, you would receive $6730 in cash flow annually. In general, CEFs are chosen as investments by those who want regular (but not guaranteed) cash flow, such as retirees.

Unlike open-ended mutual funds, CEFs usually trade at a discount or premium to the value of the assets in the fund (called the net asset value). In general, investors try to buy CEFs when the discount to the net asset value is larger than average, and extra money is made as the discount narrows and the share price increases. (Note that this gain is only realized if shares are sold as their value increases, similar to an open-end mutual fund or individual stock.)

A second feature of CEFs is debt, because many CEFs borrow money to buy holdings in the fund. Debt can boost the yield by adding to the number of holdings in a CEF that are paying dividends, interest, or capital gains income. But it can also magnify losses because securities can lose value if interest rates rise—especially securities sensitive to interest rates, such as bonds.

One final feature to remember is that part of the income of some CEFs consists of “return of principal (capital)” rather than earnings. A CEF may return principal if, for example, it is unable to meet periodic distribution levels that shareholders have come to expect. Depleting capital can erode the CEF’s share price over time. This is usually not a problem for well-run funds and can be advantageous when taxes are due.

Although all of this may appear complicated, it really is not. CEFs may be a way to assist cash flow in retirement, but consulting with your adviser is the best option to help determine your level of comfort, safety, and financial needs.

The bottom line

Dividend stocks and CEFs can be helpful investment vehicles for those who want regular cash flow in retirement. Starting to invest in these vehicles at any age, but especially in the several years before retirement, can help ensure that you have enough income to make retirement enjoyable. Discuss this information with your retirement specialist so you can make the best choices.

Here is what I am doing, as I sit a few years away from retirement. After much research (see Looking to invest? Start here sidebar), I have moved some of my mutual fund investments into dividend-paying stocks, and purchased several CEFs to add to my portfolio (most are equity or stock funds, but some are municipal bond funds that produce tax-free income, important for me in retirement). All of the dividends and cash yields from these investments are reinvested each month so that I can purchase more shares of the dividend stocks and CEFs, just like I do with my mutual funds. The nice thing about doing this now—a few years before retirement—is that I can see roughly how much income my investments will throw off for retirement (the exact amount will change as I make investment changes and add more cash to these accounts). So I know that if I were to retire today, I would have enough cash to fund my monthly expenses. Of course, I do not plan on retiring now because I thoroughly enjoy working and wish to continue growing my investments to ensure even more security for when I do decide to retire (which is important because of inflation and if my expenses increase in retirement).

Shawn P. Messonnier, DVM, owns Paws & Claws Animal Hospital and Holistic Pet Center in Plano, Texas, and serves on the dvm360® Editorial Advisory Board. He has written multiple books on marketing as well as holistic veterinary medicine.


1. Ross S. a history of the S&P 500 dividend yield. Investopedia. Updated May 5, 2020. accessed January 18, 2021.

2. Foster M. What is a closed-end fund? The ABCs of CEFs. December 31, 2020. accessed January 25, 2021.

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