I’m a big fan of passive investments. In fact, not only do I have some myself, but I’m always on the hunt to find a few more. Passive investments are the perfect way to invest because they enable you to earn money while you’re busy doing other things.
Yes, even sleeping!
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Some of the best passive income investments for 2021 include a few you’re probably already aware of. But there are also a generous number you’ve probably never heard of.
Either way, it helps to have a list of passive income options available to help you choose the ones that will work best for you.
Here’s my list of the 10 best passive income investments for 2021:
1. Dividend Paying Stocks
Dividend paying stocks may not provide the explosive price appreciation seen with pure growth stocks, but they offer steady, predictable returns. And because of those steady returns, they tend to enjoy more price stability while providing a regular cash flow.
But unlike fixed income investments, like certificates of deposit, dividend paying stocks also offer capital appreciation to go with those dividends. That will give you the benefit of both a stable cash flow and price appreciation. What’s more, these stocks typically pay higher dividend yields than the sub-1% rates currently being paid on savings accounts, money markets and CDs.
“The advantage to buying a stock that consistently pays a dividend versus a bond is bond payments are fixed and don’t increase over time,” notes Robert R. Johnson, Professor of Finance at Heider College of Business, Creighton University, and CEO and Chair at Economic Index Associates. “Dividend paying stocks not only have a cash flow, but typically that dividend payment increases markedly over time. In addition, stock prices generally rise over extended periods of time.”
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Adds Johnson: “Coca-Cola, Hormel, Genuine Parts, Procter & Gamble and Johnson & Johnson are all examples of dividend kings that have increased dividends for more than 50 consecutive years.”
Dividend Aristocrats
One place to find the best dividend paying stocks is with the Dividend Aristocrats. The list currently includes 65 stocks, each listed on the S&P 500, and providing at least 25 years of steady dividend increases.
“When you own a Dividend Aristocrat you own shares of a business whose management has proven it understands its fiduciary responsibility to shareholders,” recommends Marc Lichtenfeld, Chief Income Strategist at The Oxford Club. “By prioritizing establishing a track record of annual dividend raises for a quarter of a century or more, there is less of a chance of making boneheaded and expensive acquisitions or ill-timed stock buybacks. Furthermore, you can be confident it’s a company that knows how to grow its cash flow in order to sustain the annual dividend increases.”
Examples of high dividend stocks included in the dividend aristocrats are AT&T (7.2% yield), Cardinal Health Inc. (4.3%), and AbbVie Inc. (5.0%).
But if you prefer, you can invest in a dividend aristocrat ETF. The ProShares S&P 500 dividend aristocrats ETF has a current dividend yield of 2.57%, and has returned an average of 12.52% annually for the past five years (through December 31, 2020), including 8.37% in 2020.
2. Real Estate
Of course, I mean investment real estate, the kind that produces rental income. If you own your home, you’re already aware of the potential for capital appreciation. Investment real estate plays on that appreciation, and more.
With investment property, you’ll rent the home to tenants. At a minimum, the rent should cover the monthly mortgage payment. But as rent levels rise over the years, the property will eventually produce a positive cash flow.
All while that process is taking place, the value of the property is rising. At that point, you’re profiting from two different directions – capital appreciation and a net profit on rent.
If you hold the property until the mortgage is paid, you’ll have a choice to either keep the property and collect an even larger share of the rent as profit, or sell the property for a huge, one-time windfall.
In fairness to reality, however, it has to be said that rental real estate is at best a semi-passive investment. You will need to be involved in purchasing the property, getting it ready for occupancy, and finding new tenants each time a previous one moves out. And throughout the process, there will be maintenance and repair requirements that will cost you in money, time, or both.
3. Real Estate Investment Trusts (REITs)
If you want to invest in real estate, but you don’t want the responsibility of maintaining one or more individual properties, you can invest in real estate investment trusts, commonly known as REITs.
REITs are something like mutual funds that invest in real estate. But not just any real estate – a typical REIT holds commercial properties. Those can include office buildings, retail centers, large apartment complexes, medical facilities and other types of non-residential property.
REITs distribute net income from the trust in the form of dividends. But you’ll also participate in capital appreciation when properties within the trust are sold.
Historically, commercial property has been one of the most profitable ways to invest in real estate. REITs will give you an opportunity to invest in these properties, similar to the way you invest in stocks. You can buy and sell shares in these trusts through major brokerage firms.
“Real Estate Investment Trusts (REITs) are a unique business structure that invests in real estate and requires the organization to distribute over 90% of its funds from operations to investors in order to qualify as a REIT,” explains Greg Hahn, Chief Investment Officer at Winthrop Capital Management.
Hahn suggests National Retail Properties (NNN) and Medical Properties Trust (MPW), each offering distribution yields greater than 5%.
Hahn also cautions: “REITs are highly leveraged since the underlying real estate in the trust is typically secured with a senior commercial mortgage loan up to 75% on a loan-to-value basis. While REITs offer higher income for investors, they are highly volatile and are more correlated with the stock market than with bond investments.”
4. Peer-to-Peer (P2P) Loans
P2P lending is a way to earn higher returns on your investments by making loans directly to consumers. P2P lenders make personal loans available to consumers for various purposes, and monthly payments are collected and paid to the investors in those loans.
As an investor, you don’t typically purchase an entire loan. Instead, you’ll purchase slices of loans, referred to as “notes”. These notes can be purchased for as little as $25. That means you can spread an investment of $5,000 across 200 different notes.
Because you are acting as a direct lender to consumers, the interest rate returns on your investment are much higher than you can get through more conventional investments.
One of the largest of the P2P lending platforms, Prosper, reports an average annual return of 5.3%, which is well above what you can get with bank savings products and U.S. Treasury securities. (The traditional leader in the P2P space, Lending Club, is no longer accepting new investments due to their recent acquisition of Radius Bank.)
5. Create and Sell an Online Course
This is another passive income source I like because it’s one I’ve done myself successfully. And I’m hardly the only one. Thousands of people are earning passive streams of income from creating and selling online courses.
Now the online course strategy will require something of an upfront investment, and that will be your time and effort in creating the course. But you can get help doing that through online services, such as Udemy and Kajabi.
You’ll need to choose your course topic carefully. It will need to be one where you have expert knowledge of the subject matter. The topic potential here is almost unlimited. You can produce online courses on how to start a new business, how to invest, build a tiny home, get out of debt, homeschool your children – you name it.
One of the best ways to find online course topics is to scout around and see how many there are in a given niche. If there are a large number, it’s an excellent sign that demand for that topic is high.
Once you’ve created your course, you can sell it through blogs and websites that cover the same topic niche. You can offer your course under an affiliate arrangement, in which you’ll pay sites a percentage of the fee you’ll collect for each course sold through that site.
If you get your course advertised on multiple related websites, the cash from sales will come rolling in, without any effort from you. You can increase your cash flow from the same product by advertising for sale on additional websites.
6. Intermediate Bond Funds
If you like interest income investments, intermediate bonds can be an excellent choice. They pay much higher rates of interest than banks and US Treasury securities.
And while they aren’t risk-free, they’re much more stable than long-term bonds. Intermediate bonds typically have maturities of less than 10 years, which makes them much less sensitive to interest rate changes that can lower the market value of longer-term bonds when interest rates rise.
“REITs and dividend stocks are stocks, which means they’re risky” warns Holmes Osborne, at Osbourne Global Investors. “Meanwhile, real estate is at an all-time high – and also risky. Intermediate bond funds are the safest of the group of investments mentioned.”
Probably the best way to invest in bonds in a way that will provide adequate diversification is through bond funds.
An example is the Schwab U.S. Aggregate Bond ETF. It has a current yield of 2.4%, with a five-year average annual return of 4.31% through the end of 2020. The average maturity of the bonds in the fund is eight years, and more than 85% are rated AAA. That will give you high interest returns in combination with a reasonable level of security.
7. Robo-advisors
Robo-advisors may be the ultimate form of passive investing. For a very low advisory fee, a robo-advisor will construct a diversified portfolio, then provide ongoing management. That will include periodic rebalancing to maintain target asset allocations, and reinvestment of dividends. As an investor, your only job will be to fund your account – then relax.
“A robo-advisor—also known as a robo, a roboadvisor or a robo-adviser—is a type of brokerage account that automates the process of investing,” reports Forbes Contributor, Miranda Marquit. “Most robos charge lower fees than conventional financial advisors because they invest your money in prebaked portfolios made primarily of specially chosen, low-fee exchange-traded funds (ETFs). Some robo-advisors also offer access to other more customized investment options for advanced investors or those with larger account balances.”
Two of the most popular robo-advisors are Betterment and Wealthfront. Each will provide complete portfolio management for a very low fee of just 0.25% of your account balance. The passive nature of these robo-advisors makes them an excellent choice for either a retirement account or a taxable investment account.
8. Real Estate Crowdfunding
Real estate crowdfunding is another way to invest in real estate, but one that’s more specialized. That’s because they give you an opportunity to invest in very specific real estate investments.
An example is Fundrise. The platform offers two very distinct investments. The first is what’s known as an eREIT, which is a non-publicly traded REIT available only through Fundrise. You can invest in an eREIT with as little as $500. The Fundrise eREIT has been producing returns ranging between 8% and 12% per year over the last several years.
Similar to publicly traded REITs, the Fundrise eREIT also invests in commercial real estate, like office buildings and apartment complexes.
But the platform also gives you the ability to invest in individual real estate transactions. This is done through a Fundrise eFund, which requires a minimum investment of $1,000.
Within the fund, either raw land is purchased and developed for sale, or existing properties are acquired, rehabbed, and sold at a profit.
It’s an opportunity to participate in the type of real estate transactions that produce big returns, but are also the kind you don’t want to take on by yourself.
9. Buy Royalties
This is probably the most unique passive investment on this list, if only because few people are aware it even exists. But it’s a true source of passive income, but one with a unique twist.
Rather than investing in securities or property, you’ll be investing in licensing arrangements. In doing so, you’ll participate in the revenues generated by a wide variety of ventures, including music, videos, syndicated TV programs, mineral rights, products, oil and gas, and even venture capital financing deals.
All become available because the product creator or the original investor chooses to sell off royalties to generate immediate cash. By investing in those products or ventures, you’ll earn royalty income on your investment. It’s even possible to resell a royalty you’ve purchased later on.
You can invest in royalties through the Royalty Exchange. The exchange has been involved in a variety of royalty investments, including those by popular artists. The company claims to have completed more than 1,000 transactions worth over $84 million. The average return on investment is greater than 10% per year.
Before going into this type of investment, understand that each deal available is unique. The underlying product, the required minimum investment, the expected annual return, and the terms of the arrangement will vary with each royalty you invest in.
10. Payoff Debt
You can think of paying off debt as an investment in reverse. It’s not an investment in the true sense of the term, but it produces a similar return. Closer to the truth, that return is considerably higher than what you will get on most income generating investments.
For example, let’s say you have a $10,000 credit card with an annual interest rate of 20%. By paying it off, the 20% interest you’re paying on the line disappears.
That’s the equivalent of 20% return on a $10,000 investment in something more conventional.
But what makes paying off debt even better is that you’ll achieve that high rate of return equivalent with virtually zero risk. Not only is there no risk of loss of principal, but the “return” is guaranteed at 20%.
If you’re looking for passive, income generating investments, you should pay off any high interest debt before making those investments. If not, you’ll be leaving a very generous guaranteed return on the table.
Bottom Line
It’s fine to have some active investments, the kind you manage on a day-to-day basis. That may include picking your own stocks, investing in local businesses, or playing the fix-and-flip game with real estate.
But if you’ve acquired any amount of investment capital, the bulk of it should be invested in the kinds of ventures that will leave you free to do whatever you want in life. They generate income silently, which allows your wealth to grow while you’re busy doing other things – even sleeping!
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