Passive income has a bad reputation among some due to the perception of earning money without actively working for it, but not all forms of passive income are unethical or undeserved. One popular form of passive income is savings account or low-risk bond income, which does not involve any illicit activities. However, there are more exotic forms of passive income available to investors who are looking for alternative ways to generate income.
One investment idea for passive income generation is to dip into short-term junk bonds, which are currently offering yields around 8%, higher than investment-grade corporates and money market funds. The risk associated with high-yield debt is mitigated by factors such as a strong economy and the possibility of future interest rate cuts by the Federal Reserve. Exchange-traded funds like iBonds and BulletShares offer diversity and protection from interest-rate swings for investors interested in short-term high-yield bonds.
Another passive income investment idea is to invest in stocks that increase their dividends every year. Companies that consistently raise their stock dividends provide investors with a growing stream of income over time. While these stocks may not offer high yields initially, patient investors can benefit from a reliable income stream that can outperform the bond market in the long run. Dividend-increasing stocks can provide income growth to offset the effects of inflation, making them appealing to investors looking for rising income over time.
For retirees, annuities can provide a sense of security and protection against potential changes in social security benefits. Annuities are not traditional investments but rather insurance products that guarantee income for a certain period of time. By purchasing annuities that cover buyers for the duration of their lives, retirees can ensure a steady stream of income in retirement. Annuities can be beneficial as a secondary source of fixed payments in case social security benefits are reduced in the future.
One type of annuity that retirees can consider is a deferred income annuity (DIA), which allows them to receive payments after a certain period of time. By investing in DIAs, retirees can ensure a source of income for themselves in retirement. Additionally, qualified longevity annuity contracts (QLACs) can reduce required minimum distributions and provide additional income streams for retirees. By diversifying their annuity investments and choosing the right payout options, retirees can secure their financial future in retirement.
