Do you want to generate passive income? Of course you do!
Well, the best way to make passive income is by investing in income-producing assets.
There are risky ways and safe ways to make passive income. Generally, the more risk you take on, the higher return you can make.
Whether you want to invest $1000 or $20,000, this list will have an option that will work for you.
I will start the list with the highest-earning and riskier income-producing assets and work my way down to the lower-producing and safer income-producing asset classes.
1. Dividend-Paying Stocks
Some companies pay out dividends twice or four times a year, these are known as dividend stocks. Companies that pay dividends regularly are generally large, well-established companies, known as “blue-chip stocks”.
Blue-chip stocks are typically safer long-term investments and tend to perform better during economic downturns compared to small and mid-cap stocks.
Investing in dividend-paying stocks is a great way to make passive income.
Not only will you make money when you receive dividends, but you can also make money if your stocks go up in value.
The average dividend for a stock on the S&P 500 index is about 4.3%, but stocks grow by 10% annually on average. This means over time you can expect to make 4.3% annual return paid in dividends—while your stock will grow by 5.7% annually as well. How about that!
This is why dividend-paying stocks are some of the most popular income-producing assets out there. If you want to learn more about stocks, learn some of the best ways to invest 20k here.
2. Rental Property
Another one of the highest-paying income-producing assets is a rental property.
Renting out a property seems easy enough in theory:
- Buy a house or apartment
- Rent out the place
- Receive monthly rent payments
There is obviously more to it than that but that is basically how this rental property thing works.
A single-family home is where most real estate investors get their start. It is much easier to own and manage than a duplex or triplex (two or three separate living spaces in one building). There are fewer tenants, fewer things that can break, and fewer payments for you to organize.
If you want to own real estate, but don’t want to do all the little things that being a landlord requires, not to worry. You can pay a property manager to advertise your property, screen tenants, collect rent, and organize repairs. Property managers charge roughly 5-10% of the total weekly rent that is collected.
3. Real Estate Investment Trusts (REIT)
You don’t need hundreds of thousands of dollars to start investing in real estate. In fact, you can start investing in real estate through a real estate investment trust with less than $1,000.
REITs are basically mutual funds but for properties. A company (trust) operates a collection of rental properties and they use money from investors to buy more properties.
REITs are also one of the most popular income-producing assets. Over 80 million Americans or roughly 40% of America’s households own REITs.
You can purchase shares in a REIT on the NYSE or NASDAQ.
REIT shares are priced by the market throughout the trading day, like all companies that are publicly traded.
REITs will typically increase in price when their earnings increase. Growth in REIT earnings is typically generated by higher revenues, lower costs, and opportunities to purchase assets.
Your portfolio value will also rise when the properties within the REIT are revalued (typically once every 6 months).
Some REITs to Invest In
Here are some of the largest and most well-known REITs for you to consider.
4. Peer-to-Peer Lending
Another great income-producing asset platform is peer-to-peer lending, also known as crowdlending.
Peer-to-peer lending (P2P) is the practice of lending money to individuals or businesses through online services that match you with a borrower.
Peer-to-peer lending is a relatively new way of investing your money, with Prosper first launching in the US in 2005. You can expect to make a 3-7% return annually through P2P lending.
Peer-to-peer lending is also one of the riskiest ways to generate income on this list.
P2P platforms that find borrowers don’t have strict credit checks as you’d expect at a large brick and mortar bank, so there is a chance that you won’t ever get your money back.
Therefore, it’s important that you take a good look at the platform and do your own research before investing.
5. Certificates of Deposit (CDs)
A certificate of deposit (CD) is a low-risk investment option that is offered by banks and credit unions.
CDs offer a premium interest rate (over typical checking accounts) because the customer agrees to lock the money away for a specified amount of time (term length).
CD terms typically last from three months to five years. You cannot withdraw your money from a CD without taking a penalty.
You’ll typically find the best CD rates during promotional events. These CDs normally have unusual term lengths such as 13 or 21 months, instead of the typical length of 6, 12, or 18 months.
CDs are insured by the FDIC up to $250,000 and therefore are considered very low-risk investments.
Drawbacks to CDs
Certificates of deposits do have a few drawbacks.
Inflation: Your CD gains can be overtaken by inflation. The average inflation rate in the US from 1914 until 2020 is 3.25%, and you’d be lucky to get an interest rate this high through a CD.
Low Interest Rates: You can make more money by investing in other income-producing assets in this article. If you’re young, you can afford to take on more risk and make higher returns by investing in real estate or the stock market.
Term Length: It’s unfavorable for your money to be locked away for a specified amount of time. You may have other financial goals that you have to put on hold (buying a car, home, or vacation) because you’ve locked your entire savings away.
U.S Treasury bonds are a great long-term, secure investment that will provide you with an ongoing source of passive income.
What Is a Bond?
A bond is a chunk of debt that you are purchasing from an individual or party, which is typically a company or government. To reward you, they will pay interest throughout the holding period until the maturation date.
You will typically receive coupon (interest) payments once or twice a year.
Savings or Treasury bonds are issued by the United States government and are some of the safest bonds you can buy. It’s highly unlikely that your loan will not be repaid.
You will typically make a 1-3% annual return, but the interest rate changes regularly.
Bonds are often the number one choice among investors who want to own an income-producing asset while taking on very little risk.
While bonds are typically safe, the type of bond you buy will influence the level of risk involved with this investment. There are many types of bonds including, but not limited to Premium bonds, Treasury bonds, corporate bonds, and Junk bonds.
If you want to learn more about investing it’s a great idea to start by reading some of the best books on investing.