(Keith Speights)
There are many ways to generate income. Of course, you can work for an employer. You could run your own business. You can be independent. But all this requires an active and continuous effort on your part.
On the other hand, passive income does not require you to work. It puts your money to work for you. Granted, you will likely need to make your dues to build up a large enough amount to generate significant passive income.
Some methods of generating this type of income can be quite complicated. But not all. Here are three easy ways to earn over $50,000 in annual passive income.
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1. Invest in High Yielding Dividend Stocks
Probably the most popular way to generate passive income is to invest in high yielding dividend stocks. Definitions of what exactly dividend yield qualified high threshold may vary. However, most investors would probably agree that 5% is a high return.
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If we use this level as a benchmark, it would take an initial investment of $1 million to produce $50,000 in annual dividend income. This may seem like an unattainable level to some. The good news, however, is that many Americans will be able to accumulate $1 million or even more when they retire.
It’s not hard to find dividend stocks with yields of 5% or more. There are over 800 currently trading on US exchanges.
You’ll definitely want to research the stocks before you buy, however, to make sure the underlying companies are strong enough to keep the dividends flowing. I think investors should take a look at two high-yielding dividend stocks, in particular.
Medical Properties Trust (NYSE:MPW) is a real estate investment trust (REITs) which focuses on the ownership and leasing of hospitals. Its dividend yield is nearly 6.6%. The company owns nearly 440 properties in the United States and nine other countries. Medical Properties Trust’s business is strong and diversified across 53 tenants.
Enterprise Product Partners (NYSE:EPD) is an intermediate energy company with a distribution yield of 7.1%. The company has increased its distribution for 23 consecutive years. Enterprise owns more than 50,000 miles of pipelines that transport natural gas, natural gas liquids, crude oil and petrochemicals. It is thriving with the current market dynamics and is also expected to have solid long-term growth prospects.
2. Invest in closed-end funds
I firmly believe that closed-end funds (CEFs) are a underrated alternative to generate passive income. A CEF is a special type of mutual fund that does not issue new shares (hence the “closed end” part of the name). Unlike standard mutual funds, however, you can buy and sell CEFs like stocks.
The returns available from CEFs vary. However, you will have no problem finding several with yields of 7% or more. Keep in mind that CEFs charge an annual expense fee. But the best ones are well worth the price because you get access to top-notch investment managers who continually seek out the best sources of income.
A few CEFs you might want to check out are the AllianceBernstein Global High Income Fund (NYSE: AWF) and the Nuveen Preferred Securities and Income Fund (NYSE: JPS). The yield of the former is currently around 7.7%, while that of the latter exceeds 7.3%. An initial investment of $685,000 at these rates would provide over $50,000 per year in income.
The AllianceBernstein CEF mainly holds corporate bonds, as well as government bonds. The Nuveen CEF invests in bonds, common stocks and preferred stocks. Both funds are currently available at a discount to their net asset value (NAV), which is the funds value calculated by subtracting all liabilities from the market value.
3. Write covered calls
You can also generate significant passive income by writing covered call options on stocks. This approach involves a bit of work on your part though, so it’s not as simple as the other two methods mentioned.
The basic idea is to sell call options on stocks you already own. The amount of your additional earnings will depend on several factors, including the option’s expiration date, strike price, and level of volatility. However, you will need to own 100 shares for each call option you sell, since each call option gives buyers the right to buy 100 shares.
If that sounds too complicated, there are simpler options. You can buy an EFC or an exchange-traded fund (ETF) that sells covered call options.
For example, the Global X Nasdaq 100 Covered Call ETF (NASDAQ: QYLD) sells monthly call options on the Nasdaq-100 Index. Its yield is currently 11.8%. The ETF’s expense ratio is 0.6%. An investment of less than $447,000 would provide over $50,000 of passive income per year.
Of course, the performance of this ETF has lagged its underlying index over a period of years. But it is less volatile and, more importantly, gives you an impressive monthly income stream.
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Keith Speights holds positions at Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
