Investing 100K for passive income is not an easy feat. The problem is not the size, of course, but the word “passive”.
People might have $100K available to invest (and congrats!), but there isn’t any practically helpful guide when it comes to this aspiration.
No doubt, online articles are a great source of information. But all they seem to do when it comes to this inquiry is to bombard you with as many investment options as their authors can think of, completely forgetting the fact that you are looking for “passive income” options.
Well, we won’t do that. We value your time and in this article, you will learn how to invest $100k for passive income. True passive income; no constant monitoring or changing things in your portfolio all the time.
Take a couple of minutes to carefully read what will follow and this can be the last article that you read about the matter…
First, the hard truth: you won’t make a life-changing passive income stream out of $100,000.
An easy way to demonstrate this harsh reality is through an extreme scenario. Even if you are so lucky that you manage to find a great investment vehicle that yields a sustainable 10% annual yield in absolutely passive income, this is $10,000 per year.
Depending on where you are in the U.S. or Canada, this might take care of your groceries. Yes, in some countries, you might even take care of everything if you’re extremely frugal. But in most cases, it won’t be retirement money and you will still have to generate more income.
But that’s an extreme scenario. A yield of 10% is a daydream for passive investors. Heck, even for those who actively manage portfolios, this would be truly exceptional.
In other words, the passive income you will most likely generate with $100K will be an underwhelming amount. So make sure that this is what you want.
The reason I’m stressing this is that if you can be patient and invest $100K in a way that prioritizes growth over income, sometime in the future, you might have an amount that will generate a more significant passive income.
Regardless of what you decide to do right now, it’s a good idea to know how exactly you could generate passive income in a low-risk way.
The Low-Risk Way to Invest 0K for Passive Income
How do you invest $100K for passive income in the safest way possible while still generating a good yield on your investment? The answer is High-Dividend ETFs.
You might have already heard of ETFs (Exchange-Traded Funds). They are these funds that you can trade on stock exchanges like stocks. They are like mutual funds with the added benefit of high liquidity (easy to buy and sell fast) and generally lower fees.
When you buy an ETF, you indirectly own everything that the fund invests in, whether it be stocks, bonds, commodities, etc. High-Dividend ETFs usually invest in stocks that pay high dividends relative to their prices. Owning such an ETF will give a claim on such dividends and the fund will pay them to you on a monthly, quarterly, or annual basis.
Tip: You can use Wealthica’s Earnings & Dividends Power-Up to keep track of your dividend payments. Sign up to Wealthica to get started.
Here are a few things to consider when selecting a high-dividend ETF…
The dividend yield is a theoretical dividend return on your investment you could realize per year if you bought the stock. It’s dynamic and changes based on the stock’s price.
For instance, if you invested $100,000 in a stock with a dividend yield of 5% and held it for a year, assuming that the dividend payments weren’t cut, you would receive $5,000 in dividend payments. If you held this investment and the dividend increased, the dividend yield would change probably along with the price. But your dividend yield, the one called yield on cost which is based on what you paid for the stock initially, will go up.
For high-dividend ETFs, the dividend yield is calculated based on all of the underlying dividend stocks the ETF owns at any time.
What you should remember here is that very high yields (8% and up) can be unsustainable, meaning that they could be based on recent extraordinary dividend payments that could be cut by the companies the ETF invests in.
A quick way to examine the sustainability of the yield is to look at the dividend track record of the ETF in question. The bigger the trend in increasing dividend payments, the more you can trust the dividend yield.
Tip: To easily calculate your upcoming dividend payments if you end up owning multiple dividend ETFs, you can use the Income Investor Power-Up on Wealthica. This will also allow you to view your yield on cost, estimate your monthly income, and many more. To get started, sign up to Wealthica.
It goes without saying that newly issued ETFs haven’t “proved” themselves yet. So, you might want to stay away from them.
Now, when examining an ETF, check its inception date to determine that it is more than 5 years old. Ideally, it’d be safer if you excluded everything which is younger than 10 years old but if you’re not that risk-averse, a minimum of 5 years should be acceptable.
Besides the fact that ETFs that have been around for so long seem safer, they also have longer track records.
Take a look at the past performance of the fund you’re interested in; that should be posted by the issuer (the company that created the ETF) on the ETF’s official webpage. Has it appreciated in value or not? You wouldn’t want to erode your capital for a modest dividend yield.
When looking at the past performance of the ETF, check the footnotes to see if the data you look at assumes dividend reinvestments or not when calculating the returns. Most issuers do this and it’s hard to see if the principal appreciated or depreciated in value without accounting for dividends.
If the fund’s returns are negative without dividend payments in the calculation, stay away. As a passive investor, you are looking to spend the income you will receive from your investment. Not reinvesting it would mean your principal will be eroded as time goes by.
You want your ETF to appreciate in value without accounting for dividends.
The expense ratio is the fees the ETF charges you every year and is expressed as a percentage of your investment.
Generally, ETFs are famous for low expense ratios. However, a high-dividend ETF may charge more than the average ETF that tracks a broad-market index.
The expense ratio should be examined within the context of the past record and assets under management. Choosing low fees for mediocre returns over higher fees for way better returns wouldn’t make sense. In addition, small funds charge more to keep up with their expenses. So, the lower the assets under management of an ETF, the more justified a high expense ratio is.
In conclusion, there are plenty of investment vehicles that would happily take your money for delivering mediocre passive returns or putting you at much risk. But the right ETF isn’t one of them.
Sure, you will have to do some research to find a decent high-dividend ETF. But after you find it, your passive income will be truly passive.
By the way, additional contributions to the ETF you choose should be done by considering its dividend yield at the time of investing as this always changes. In some instances, it may be worth waiting until the dividend yield is about as high as it was when you made the initial investment.
One more tip. It’s understandable that this investment could be only a part of your total assets. So, make sure that you keep track of it within the context of your total net worth.
To do this, you can use a net worth aggregator like Wealthica. Such a tool will allow you to connect your bank and brokerage accounts, as well as input your illiquid assets such as your home, into one account from which you will be able to monitor your financial situation.
Things change all the time and it’s stressful to keep track of your separate accounts as time goes by. With Wealthica, this stress will be gone. Wealthica will keep track of your cost-base, money weighted returns and real returns.
Take the next step and sign up for free to keep things organized as you move forward.