How to Have Consistent Income With Less Effort?
While some investors aspire to build as much wealth as possible in the long term, many want to use their investments to generate income today.
This passive income refers to the money you earn from sources such as dividends, interest, and rent. It is the money that your money generates for you and is deposited into your family's bank account, whether or not you get out of bed in the morning.
The ultimate goal of most investors is to generate enough passive income so that they can live a comfortable life after retirement, when they can no longer earn a salary.
When building an investment portfolio, one trick you can use to stay on the path to financial independence is to measure your success by how much passive income you are generating in hard cash every year. By doing this, you can see tangible proof of your progress as the checks arrive in the mail or are deposited directly into your bank account.
Creating passive income
Imagine that you have $ 10,000 in savings that you want to invest long-term. Decides to buy 833 shares of General Electric at $ 12 per share. Let's say the current dividend per share is 12 cents per quarter. That is, every 90 days you would receive a check for around $ 100.
If you have the money directly deposited, at the end of the year you will have almost $ 400 in cash in your account.Next year, you will save an additional $ 10,000. Add $ 400 in cash to your Gener
al Electric dividend, giving you $ 10,400 in new cash. This time, you want to branch out to buy 74 shares of Johnson and Johnson for just under $ 140 a share. Let's say your annual dividend is $ 3.60 per share.
At the end of the second year, you are now generating $ 400 in passive income from your General Electric dividends and $ 266 in passive income from your Johnson and Johnson dividends for a grand total of $ 666.
When you focus on generating passive income, you can largely ignore stock market fluctuations. Instead, its main objective is to make the value of passive income grow faster than inflation. It is the difference between thinking like a long-term entrepreneur and a speculator.
A good portfolio of passive income grows over time
One of the hallmarks of a good passive income portfolio is that the cash generators you own - be it stocks, real estate, private equity, intellectual property, mineral rights or whatever - are growing every year, so you are wasting more money than last year. It is important that the growth rate of cash distributions exceed the rate of inflation so that your household income always expands, giving you more capital to donate, reinvest, save or spend.
Passive income keeps you from overpaying for assets
The main advantage of focusing on annual passive income as a measure of success is that it can help protect you from paying too much for your investments. This is a basic mathematical function.
As prices rise, cash receipts fall. An investor who is focused on increasing his passive income will not find these low-yielding investments so attractive. This provides a countervailing force as optimism spreads through the stock market or the housing market. Inadvertently, they protected their families' investments simply by focusing on passive income.
Don't fall into traps
One of the biggest risks for investors who focus on passive income investments is falling into the so-called value trap or the dividend trap. As a general rule of thumb, if an asset yields three to four times more than 30-year Treasuries, be careful. Most "cheap" assets are cheap for a reason.
In today's world, if you see a dividend of 6% to 12% or more, you are probably falling into one of these traps. It could be a company that received a one-time special dividend for the sale of an asset or for the settlement of a lawsuit that will not be repeated.
It may be a pure commodity business structured like a master limited company that has made record price profits, which the market knows cannot be sustained. It can be a cyclical business, exhibiting what investors refer to as a maximum profit trap, meaning that your returns look much better at their peak than in a full trading cycle.
In any case, be careful. Investing in passive income can serve you well, but don't be greedy and try too hard to generate income. It's very easy to lose a lot by making just an extra half point of passive income.
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