These days, working hard and retire with benefits simply does not work anymore. Absent any form of financial planning and action to invest our money, we may find retiring a huge challenge. Furthermore, Active Income is not that secure anymore, with high mobility of workforce; Companies can open and close at a whim, salary increases may not keep pace with inflation and more. This is the reason we need to build our Passive Income while we can and as early as possible to reap the benefits later on. Here are 10 ways in which you build your Passive Income, make your choice.
1. Dividend Stocks
There are certain Stocks which pay Dividends consistently every year. Dividends are basically payments made by Companies to the shareholders to reward them for owning the shares. Such corporations include software giant Microsoft, fast food chain McDonald's, telecommunication company AT&T and pharmaceutical company Pfizer. Dividend Stock Investment Strategy is a viable, hassle free form of Passive Income. These Companies can offer dividend yields of between 3-5% per year. These Dividend Stocks tend to be more stable businesses such infrastructure and telecommunications; which are less prone to market cycles. Long term research has shown that Stock prices move in tandem with inflation as the rise in prices of goods also get translated into increased earnings for Companies. For most Companies with a fixed payout policy, it also means increasing Dividends every year! Returns from Dividend stocks can also be compounded by reinvesting the Dividends, massively raising the Dividends.
2. Mutual Funds / Unit Trusts
Other than investing yourself, you can opt for professional managers to manage your investments for you. By investing through Mutual Funds or Unit Trusts, you can select certain sectors such as industry or geographical locations to suit your investment portfolio. Most employee investment schemes offer a wide variety of Mutual Funds to choose from. One can also apply to invest in these funds either through stock brokerages or bank relationship managers. However, some Funds charge upfront 2%-5% upon investing and will also charge an annual fee of 1%-2% and a performance fee. As such, you should only consider investing in Mutual Funds if you are willing to stay invested for at least 2-3 years.
3. Renting Stocks through Options
You can also rent stocks through options much like how you would rent properties. The technical term for this is actually called Covered Calls. A Call Option is a contract which give the buyer the right, but not the obligation to buy a stock at a certain price (Strike Price) at any time before the Option expires. For a Covered Call, you basically sell a Call Option on a stock which you already own. Used as an extension to the Dividend Investment strategy, you will be able to receive Option premiums of 1-5% return per month and collect Dividends at the same time. This strategy is best used in periods of low volatility or when there is limited upside potential for the Stock you are holding.
4. Real Estate
Investing in property can yield the highest payoff among all investments due to leverage. One can purchase a property which is valued many times the cash outlay required through bank loans. When investing in Properties, the main considerations are rental yield, location and occupancy rate of the building. Rental is a great form of Passive Income which is generated while still holding the property and profiting from further capital appreciation. However, property investments are very illiquid and can be quite tough to sell especially in an economic downturn. Leverage is also a double edged sword, it could magnify profits, but it could also magnify losses.
5. Bonds/Fixed Income
Bonds provide a fixed return depending on the yield which you purchase the bond at. Bonds are typically classified into government bonds and corporate bonds. Government bonds such as T-Bills are supposed to be high investment grade until recently with the Debt Ceiling fiasco and the fact that the US budget deficit is at an all-time high poses risks for US bonds. Even Euro bonds suffer structural problems in the EU and huge debts of some European countries. AAA Corporate bonds are currently more favoured as they are based on the strength of huge cash rich global companies such as Microsoft and Exxon Mobil. However, studies have shown that equities beat bond returns consistently in the long run. The key problem with bonds is that the income is static; hence the name fixed income, while stocks have the ability to appreciate during economic growth.
6. Network Marketing / Multi-Level Marketing
Network Marketing / Multi-Level Marketing is a marketing structure which sells products or services through individuals rather than through traditional brick and mortar stores. Renowned global brands include Amway and NuSkin. How it works is that a dealer can choose to just sell the products or recruit and train new sales people. They then get rewarded by the sales incentives provided from their down line. The right way to succeed in the Network Marketing business is to focus on the benefits of the products and your service level to your customers rather than the scheme itself. All too often, people just focus on the scheme to simply recruit people and not sell the products. Through hard work and the correct approach, you should be able to build a large network of loyal customers and eventually recruit people into your sales team. When you have built a substantial down line of successful network marketers, you can sit back and enjoy the Passive Income.
7. Savings Plan
Savings Plan work by forcing you to save or contribute a fixed amount on a monthly or yearly basis until maturity. The Savings Plan typically earns interest at a rate which is marginally higher than bank savings rate to entice investors. They may also include an unguaranteed portion which depends on the performance of the insurance company or overall market. On maturity, the Plan starts returning money back to you, either in a lump sum or periodically. You should always take into account Time Value of Money when determining returns to ensure that you are earning a decent rate of return.
8. Royalties/Intellectual Property
You can also make Passive Income by writing books, creating movies or music. These are known as royalties or intellectual property. If you have knowledge which is sought after, why not put it in a book and get it published? After which, you will get paid with every book that is sold in the bookstore for the rest of your life. If you have a passion for music, why not write a song for record companies to use? Famous individuals such as Robert Kiyosaki, Author of Rich Dad, Poor Dad and Anthony Robbins created massive Passive Incomes by writing many award winning books, sharing knowledge and making money at the same time.
Blogs are a collection of the author's life, hobbies or sharing of knowledge. It can be in words or in video form “YouTube”. The idea is to attract enough web traffic on the blog such that advertisers will be willing to pay you money for promoting on your site. The advertisers can range from syndicated advertising such as Goggle Adsense and Chitika, to affiliate marketing such as Amazon or to direct advertisers. Adsense operates on a Pay per click while affiliate marketing normally requires the customer to have purchased a product/service before you are entitled to commissions. Blogs require a large number of readers to make a significant amount of money, therefore Search Engine Optimization and constant promoting of the site is crucial. Blogs also have to be regularly updated with exciting content such that people will keep returning for more.
10. Article Writing
Article writing is a newer form of Passive Income that is catching on. Instead of having to build websites or blogs from scratch, you can post directly to article sites like Infobarrel. These website have a revenue sharing scheme for all income earned from the advertisements. These websites also have large numbers of general traffic and so you do not need to work on building traffic to your site. If your article is relevant and helpful, it will get noticed very quickly and will generate a lot of traffic. Once the article is posted, it will always be yours and will create passive income for you as long as there are people reading it. These articles can also work to link back to your website and direct interested readers to your own blog/website. Infobarrel currently has the highest revenue sharing proportion, 75-25 basis (you 75%, Infobarrel 25%) compared to many others which share 50-50 or less.