Ways to Generate $25k In Passive Income: An entire field of academic study is devoted to the habits of millionaires and billionaires.
Among other big questions, researchers want to know what characteristics and habits set the ultra-wealthy apart from everyone else. Is it simply good fortune, or do millionaires do something different when it comes to building wealth?
Studies show that the top one percent share certain traits and behaviors. However, the biggest differentiating factor is relatively simple. Millionaires don’t rely on a single income stream, such as a high-paying corporate position or a lucrative business. The wealthiest people in the world have multiple income streams.
The average number of income streams among the ultra-rich is seven, though a few have significantly more. Aside from C-suite positions or successful start-ups, typical examples of income streams include capital gains income, interest income, and rental income.
Of course, average investors aren’t necessarily in a position to generate substantial income through these methods. More practical ways to generate $25,000 in passive income include covered calls, dividend-focused investments, and preferred stocks. Here’s what you need to know.
Are Covered Calls Safe?
Options trading is a step up from buying and selling stocks. There are several options strategies, and some are extremely risky. For example, selling a call option gives the buyer of that option the right, but not the obligation, to purchase shares at the strike price listed in the contract.
If the investor selling the call option doesn’t own the underlying stock already, the potential losses are theoretically unlimited. The underlying stock could increase unexpectedly, putting the writer of the call option in an unpleasant position when the buyer exercises the option.
On the other hand, a covered call carries far less risk and comes with an opportunity for effortless passive income. The seller of the covered call option owns the underlying stock, so there is no risk of unexpected losses if share prices go up.
The buyer of the covered call option pays a premium to the writer for the opportunity to buy the stock at a predetermined price by a specified date. If the underlying stock’s price goes down and the option expires with no action, the seller of the covered call keeps the premium. In other words, covered calls are a safe way to generate passive income with minimal risk.
If writing options seems a bit too complex or time-consuming, there are Closed-End Funds (CEFs) and Exchange-Traded Funds (ETFs) that do the work on behalf of their shareholders.
These funds trade on exchanges like stocks, and they create returns for their shareholders by writing covered calls. Examples include the Madison Covered Call and Equity Strategy Fund, a Closed-End Fund, and the Global X Nasdaq-100 Covered Call ETF, an Exchange-Traded Fund.
Can You Get Rich From Dividend Investing?
High-yield dividend stocks are an effective method of boosting returns because profits don’t rely on an increase in stock price. Instead, companies pay out a portion of earnings to shareholders directly as dividends. The dividends can be reinvested to generate additional returns.
Startups that are in the early stages of growth tend to get the most attention because their stocks increase by double and triple digits year over year. However, as tech investors learned in 2022, a history of rapid growth doesn’t guarantee that strong returns will continue. Stocks can go down as quickly as they go up, leaving shareholders with dismal results.
Recent examples include Peloton stock, down 72 percent year to date, Zoom stock, down 42 percent year to date, and Upstart stock, which is down 82 percent year to date.
Dividend stocks are generally found in more mature companies, and the best dividend stocks have a high yield and a long history of regular, increasing payments. The key to getting rich from dividend investing is to choose reliable companies that are likely to have the resources for continued dividend payments.
Some of the most dependable high-yield dividend stocks include:
Amcor PLC – 3.81 percent dividend yield
Exxon Mobil Corporation – 4.04 percent dividend yield
IBM – 5.15 percent dividend yield
Realty Income Corporation – 4.16 percent dividend yield
Walgreens Boots Alliance – 4.97 percent dividend yield
Each of these companies has achieved Dividend Aristocrat status, which means they have increased their dividends every year for 25 or more consecutive years. That doesn’t guarantee that dividends will continue to grow, but it does improve the odds of future increases considerably.
What Is The Difference Between Stocks and Preferred Stocks?
Trading standard stock, also known as common stock, offers an opportunity to generate profit in two ways. The value of the stock can go up, or the company can pay dividends to shareholders. In some cases, shareholders enjoy both benefits from a single company.
Preferred stocks are a bit different. They offer a separate set of advantages and disadvantages compared to their common stock peers. While the details differ from company to company, all have one advantage in common: preferred stockholders are entitled to a larger portion of the profits compared to common stockholders. That’s helpful for investors seeking creative ways to generate $25,000 in passive income.
Some of the highest-yielding preferred stocks include:
Specific yields depend on which series of preferred stock investors hold.
Those that find it impractical to purchase preferred stock from individual companies can choose from a selection of CEFs and ETFs that focus on preferred stock.
Examples of preferred stock CEFs include the Flaherty & Crumrine Preferred Securities Income Fund and the Nuveen Preferred & Income Opportunities Fund.
Two popular ETF options include the iShares Preferred and Income Securities ETF and the Virtus InfraCap U.S. Preferred Stock ETF.
Generating Passive Income: The Bottom Line
Building wealth through passive income requires some cash, but you don’t have to be a millionaire to generate significant returns.
Start with an affordable amount and make regular contributions to your portfolio. Then, reinvest returns in income-producing assets.
A patient, disciplined approach is the most dependable method of growing your portfolio long-term.
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