6 Paths to Passive Income
Whether you’re trying to pay off debt, top off your emergency fund or invest more, a little extra monthly income can get you there faster.
But there are only so many hours in a day—and maybe adding another side hustle to your busy schedule just isn’t possible. Wouldn’t it be great if you could somehow earn more without working additional hours or hitting up your boss for another raise? That’s what happens when you create passive income streams.
“Passive income’s great because it increases your cash flow and allows you to save [more],” says financial advisor Craig J. Ferrantino, president of Craig James Financial Services, LLC in N.Y. “The initial effort in some cases is minimal, and you have the ability to collect money on those efforts over a period of time.”
Of course, investing in the stock market can provide earnings over time through market returns and the magic of compounding. But there are also ways to create steady streams of passive income that pay out at regular intervals.
These efforts don’t come without risk. But with careful planning and consideration, you can lower the risks—and initial costs—and increase the potential benefits.
Here are six paths to passive income that may be worth pursuing.
1. High-Dividend Stocks
When you purchase stock in a company that pays dividends to its shareholders, you’ll start earning a percentage of the company’s profits automatically. For example, if a company pays an annualized dividend of 50 cents per share and you own 500 shares, you’ll get an extra $250 in your pocket—for doing nothing more than being a shareholder. (Most companies pay dividends on a quarterly basis, so you’d earn about 13 cents per share each quarter.)
Certain industries, like public utilities, financial services and oil, tend to pay higher dividends than others, so do your homework with resources like Yahoo! Finance’s stocks screener or by talking to an advisor.
“If you’re going after dividend income, the sweet spot is not the company that’s currently paying the highest yield, but the companies that are likely to generate growth in dividends in the coming months and years,” says Rob Brown, a Certified Financial Analyst and chief investment officer at United Capital. “Pay attention to what companies and industries are thriving now; they are most likely to raise the dividends they’re paying now in the future.”
You may also choose to reinvest your dividends, which allows you to buy more shares even without spending more money, so you can benefit more when the price rises.
One caveat: Remember that there are risks involved with investing in individual stocks—even ones with high-dividend yield—as the price of the stock can go up or down. You can lower your risk by investing in an index or other low-cost funds, which contains shares of many companies. One option is to look for dividend-paying ETFs, or exchange-traded funds, which are funds that trade like stocks. (Investing apps like Acorns and Betterment use such ETFs and reinvest dividends automatically.)
Purchasing bonds can be another good way to earn consistent passive income, though the amount you’ll receive depends on the fluctuating bond market. “Bondholders [usually] receive a check every six months for the interest earned in loaning the entity money, and, in turn, get their principal back at maturity,” Ferrantino explains.
There’s a wide variety of bonds to choose from, including U.S. Treasury bonds, municipal bonds and corporate bonds. Each has its own maturity date, minimum investment, interest rate and payout. For instance, Treasury notes mature in two to 10 years and pay interest semiannually at a fixed rate (currently about 1 percent to 2 percent, depending on term lengths, and it is exempt from state and local taxes), while corporate bonds pay taxable interest and can have maturities ranging from a few weeks to 100 years.
Before purchasing bonds, make sure you know what you’re getting into—and what you will get out of it.
3. Rental Properties
Acquiring and maintaining rental property can require a lot more investment and sweat equity than other types of passive income, both upfront and over the years (if the roof leaks or the boiler breaks down in a rental property, you’re on the hook for it). But rental properties can also provide lucrative, ongoing income for many years to come.
“Rental properties in a market you understand can be a fantastic passive investment,” says Jeffrey Zucker, a seasoned angel investor and property management entrepreneur in Chicago. “I look for large or fast-growing housing markets, where people are clamoring for affordable, nice places.”
Before purchasing a property, Zucker recommends comprehensive due diligence to ensure that you can cover your costs—which likely include insurance, taxes and maintenance—and turn a profit on top of that. You want to invest in a property that will draw continued interest from renters and increase in value.
He also recommends using an experienced property manager. “There are some great property management companies out there that can assist to make leasing out rental properties truly passive mailbox money,” Zucker says. “Having managed our own properties for a few years prior to partnering with a company, we learned the long hours and effort that go into maintaining properties and dealing with tenants—and how much better those who focus solely on this role are at the job.”
4. Rewards Credit Cards
This might seem like an odd addition—and this is not a strategy to pursue unless you are able to pay off your bill in full each month. However, if you can use credit responsibly and avoid racking up debt, rewards credit cards can provide easy income, thanks to perks like cash-back bonuses. For instance, use a cash-back card for all your household expenses—and pay it off at the end of the month—and you’ll earn money simply by making necessary purchases. (Ferrantino recommends a card like the PenFed Platinum Cash Rewards Visa, which gives you 5-percent cash back on gas purchases and another 3 percent for groceries and has a low annual fee. NerdWallet also has a ranking of the best cash-back cards, including several with no annual fee.)
“My rewards have paid for a variety of travel experiences, and I have friends that use their points to pay exclusively for a certain [budget] category, like gas or household bills. It’s nice for them to cross an expense off simply by doing all of their planned spending on the right card,” Zucker says. “Be careful though, as many of the best rewards cards have high interest rates for any carry-over debt.”
5. Peer-to-Peer Lending
Also known as “marketplace lending,” peer-to-peer lending is the practice of individuals loaning money to others in place of a bank or other financial institution. In recent years, platforms like Prosper and Lending Club have made these crowdfunded loans more widely available to borrowers and opened the possibilities for investors.
“New, technology-driven intermediaries have been coming in and replacing banks to make small loans to businesses or individuals, and they offer many comparative advantages,” Brown says.
Remember, though, that while investing through a peer-to-peer marketplace can pay off—Prosper investors, for example, can earn about 5 percent to 9 percent annually—there are still risks involved and borrowers may default on their debts. One way to protect yourself, Brown says, is by requiring that borrowers’ credit quality is above a certain level, depending on your appetite for risk. You can also reduce risk by diversifying your investment across many different loans.
6. Renting Unused Space
The sharing economy is in full force, and if you have extra space in your home or spend a lot of time out of town, you can join in and earn some extra cash. Thousands of people are renting out their homes through Airbnb, and sites like Liquid Space and Breather offer opportunities to place your office or home up for rent during daytime hours. (Airbnb hosts renting a single room in a two-bedroom home cover, on average, a whopping 81 percent of their rent, according to one report.)
“Any unused space is an asset worth renting out if there is demand in your market,” Zucker says. “[Online marketplaces] offer consumers easy ways to make some extra money on rooms that would otherwise be doing nothing for them.”
June 2, 2016