There are still ways to earn passive income, but are the returns even worth it?
It’s no secret that money loses value over time. That $20 bill in your wallet is not the same $20 that was there ten or even one year ago.
Inflation has recently reached alarming new heights of 7 percent annually as of December 2021, and it’s expected to get worse in the coming months. With inflation likely here to stay for an extended period of time, you need to learn how to protect your portfolio.
Earning meaningful passive income from traditional sources like banks used to be a lot easier when interest rates were higher. But with returns slashed across the board, choosing the right passive income investment is more important than ever, as it’s the only way to preserve your money’s value and ideally increase your wealth over time.
And while many of us are accustomed to putting in a hard day’s work to make cash and build our net worth, are there still ways to take that money and generate passive income that require no effort at all?
Right now, in addition to high returns, investors are also looking for more stability in their portfolios. Economic forecasts remain uncertain and markets are swinging at the same time that inflation is skyrocketing.
Passive income can be a powerful way to reduce risk and generate cash flow, but it’s important to compare and contrast the different options to determine how much you may gain with each passive income stream. Despite the historically low rate of return, these are some of the most popular methods available to make money while you sleep:
Certificates of Deposit
Certificates of Deposit (CDs) offer a guaranteed flat percent return for the length of your investment. They’re among the safest options because the dollar amount of your investment never decreases (even though it may lose value due to inflation).
They’re also a good choice for first-timers or those who don’t have a lot of funds to invest since you can open a CD with as little as $500-$1,000. Some banks don’t even have a minimum dollar amount.
As for cash flow, the average CD rate right now is 0.13 percent for a 1-year CD or 0.28 percent for a 5-year CD. For example, if you invest $10,000 in a CD, you will earn $13 in total interest in a 1-year CD and $140.79 in total interest in a 5-year CD, which isn’t that much money let alone meaningful passive income.
There is security with CDs because as long as you keep your money in the CD for the entire term, you will grow your initial investment. However, the current rate is significantly below inflation, which makes it an inefficient way to save money or make money while you sleep.
And if you have to liquidate your CD early, you will be subjected to a penalty. It’s not much in terms of annual cash flow, especially if the money locked up in the CD is losing value year after year due to rising prices.
Savings Accounts & Money Market Accounts
Similar to CDs in terms of risk, another passive income idea is a standard savings account as well as money market accounts that accrue interest to help you safely grow your funds. Each bank account is fully insured by the FDIC or NCUA up to $250,000, so your funds are as safe as possible. You also have complete control and to begin investing is easy, especially if you have only so many hours in the day.
However, that’s about where the advantages end. You will be earning money, but currently, the average interest rate for a basic savings account is just 0.06 percent, while high-yield savings accounts and money market accounts range from 0.50 percent to 0.65 percent.
For some perspective, if you put $10,000 into each of these accounts, you’d earn a paltry $6 in interest on a basic savings account, or as much as $50-$65 in interest on a high-yield savings or money market account after one year. Despite low initial effort, it’s not exactly making money while you sleep and getting on the path to financial freedom.
While the Fed has indicated it would raise interest rates in the near future, the increase that trickles down to savings accounts and money market accounts will likely be unimpressive and result in an insignificant increase in rates that would bring back the chance to have a high yield savings account. As with CDs, the annual cash flow simply isn’t enough to keep pace with the rate of inflation. The days of having a high interest savings account to earn money passively might be gone forever.
A bond is simply a loan from an investor to a borrower, typically a government or corporation. Similar to a CD, if you hold your bond until the maturity date, you will collect the entire bond amount plus interest, which means extra cash down the road.
Investors like the predictable cash flow that bonds offer, as well as the fact that interest is usually exempt from federal taxes and sometimes from local and state taxes as well.
However, right now bond yields are near all-time-lows, and they have been on the decline for decades. The 10-year Treasury note is currently yielding only 1.8 percent, and with the Fed expected to raise interest rates in the coming months, yields are likely to go even lower. Given their lack of liquidity, while you can generate passive income and make money while you sleep, you won’t have access to your initial investment. The yield is also not a lot more money given the current rates.
Dividend Stocks and Dividend-Focused Index Funds
Dividend stocks are stocks that make regular dividend payments to shareholders. They are a common passive investment tool that can generate money and create a passive income stream as when the company performs well, a portion of its profits goes back to its investors as a cash payment.
You can choose to pocket the money or reinvest it in the company (or elsewhere), giving you complete control. Stocks such as Lowe’s Home Improvements, Johnson & Johnson, and Coca-Cola have all increased their dividend for almost 60 years in a row and currently offer yields in the 1.5 to 3.0 percent range.
Dividend-focused index funds are a collection of dividend stocks traded together in one fund in an effort to offer diversification. There are several different strategies with dividend-focused index funds. For example, some funds focus on achieving the highest yield, while others are weighted by expected yield rather than the market cap.
Some may be selected by the rate of payment (annually, quarterly, or monthly). Dividend-focused index funds generally achieve a yield between 1.5 and 5.0 percent, but they also come with management fees to keep in mind. You also need to remember they are subject to the performance of the stock market and can be a risky way to reach financial freedom.
Real Estate Investment Trusts (REITs)
If you want to generate income from real estate, it doesn’t have to mean buying tons of rental properties and serving as a landlord to generate rental income. For a more passive approach without the hassle, consider a real estate investment trust (REIT).
With REITs, you can have a much faster path to a positive annual cash flow because you don’t need to spend money on down payments, remodeling, vetting renters, and eventually selling your rental properties for a capital gain.
In a nutshell, REITs are companies that own commercial real estate. Examples include office buildings, hotels, and shopping centers.
According to Kiplinger, the average yield on REITs is 2.9 percent, which is more than double the yield of stocks in the S&P 500 but still below the inflation rate.
This figure can also vary between REITs, and it takes some research to find the best REITs to invest in. What’s more, the dividends are taxed like ordinary income, which could pose a problem for those in higher tax brackets.
Commercial real estate has also traditionally underperformed during periods of economic contraction, and is considered one of the most challenging forms of real estate investing.
Now that we’ve covered the traditional, and underwhelming, ways to earn passive income, there is one more investment vehicle in real estate that’s often overlooked. It’s in a class of alternative investments called farmland, which is one of the best ways to generate income passively through multiple income streams.
Farmland has proven over time to have far less volatility than stocks, REITs, and commodities while maintaining a similar risk level as 10-year Treasury bonds. It also provides a hedge against inflation because it maintains (or increases) its value when the buying power of the dollar declines.
The value of farmland has tripled since 2000, primarily driven by the fact that available acreage has declined. This scarcity has helped the annual return of U.S. farmland average about 10 percent over the past four decades.
Even as other passive income assets decline due to inflation or market volatility, farmland’s lack of correlation to these other assets will help ensure that your annual yield remains strong over time.
Farms offer multiple sources of wealth-building potential, such as from the value of the land increasing over time, as well as more passive income-focused activities such as the sale of its own products like the crops the land produces. From 2000 to 2020, U.S. farmland averaged an annual yield of 6.6 percent, twice the yield on 10-year Treasury bonds which averaged a yield of 3.3 percent over the same period.
Additionally, farmland in emerging markets has all of the benefits of domestic farmland, but comes with the added benefit of even greater yields thanks to the lower cost of land and labor, the opportunities to sell further down the value chain, and the favorable exchange rates against the dollar.
Choosing the Best Source for Passive Income
When deciding how to invest passively, the most important perspective to take is one of risk vs. reward. And when you compare the potential annual cash flow of the above types of investments, farmland is the clear winner in generating passive income streams.
Yet historically, farmland has been difficult for many individuals to access, and it’s often overlooked due to the perception that you have to be a farmer to actually own a farm.
But now there is a way to own farmland directly without ever stepping foot on the land while still enjoying the passive income and long-term appreciation potential that vastly outperforms any alternative after your initial upfront investment.
Visit our current opportunities page to learn more, then fill out the form below and someone will be in touch with more information on how you can start earning passive income from what many consider to be one of the best passive income ideas.