Income Producing Assets For Passive Income

My Favorite Income Producing Assets

If you are a regular reader here at Dividends Diversify, you know I focus on dividend stocks.  However, at my core, I am an income investor.

It wasn’t until my early 30’s that I really clarified my investment objectives.  Objectives that I believed in. And felt I could stick with through good times and bad.

So when it comes to my personal investments, I have three primary objectives.

INCOME PRODUCING ASSETS & INVESTMENT OBJECTIVES

I invest money primarily to achieve

1. Current income
2. Growth of that income
3. Capital appreciation

You can see that current income and growth of that income top my list of investment objectives.  Other than my personal residence, I won’t own an investment asset unless it pays a regular and recurring passive income stream.  In other words, I like to buy income producing assets.  That is why I say I’m an income investor.

Dividend growth stocks are perfect because they achieve all three of my investment objectives.  But many times I will sacrifice income growth and capital appreciation in the sole pursuit of objective 1, just plain old current income.  Who couldn’t use a little more of that, right?

INVESTMENTS VERSUS SAVINGS & RISK

Not all of the income producing assets I’m going to discuss in this article should be considered investments.  Some are more appropriately referred to as savings.  Savings products typically have less risk.

What does risk have to do with it?  Well, generally the more risk you take the greater the opportunity for a higher income from your assets and higher overall return on investment.  So we will start with the least risky income producing assets and move to higher risk income producing assets as we go.

Keep in mind that as you take more risk, you should have a longer time horizon for the money you are investing.  For example, if you need the money in 6 months for a down payment on a house, then take less risk.

Related: 15 timeless investing principles

We will also talk about the yield each income producing asset has.  Yield means the percentage of the amount invested and returned annually back to the investor or saver.  For example, invest $1,000 at a 3% yield and get $30 dollars of annual income.  Sometimes yield is referred to as the interest rate or just rate for short.

With that introduction in mind, let’s get to my list of favorite income producing assets.  We will discuss them in this order:

1. Certificates of Deposit
2. US Savings Bonds
3. High Yield Savings Accounts
4. Money Market Accounts
5. Bonds
6. Preferred Stocks
7. Dividend Growth Stocks

And better yet, you can get into most of these passive income options with $100 or even less. So not having much money is no excuse for getting started!

CERTIFICATES OF DEPOSIT

Our first income producing asset is certificates of deposit.  Investopedia defines a certificate of deposit as follows:

A certificate of deposit (CD) is a savings certificate with a fixed maturity date and specified fixed interest rate that can be issued in any denomination aside from minimum investment requirements.  A CD restricts access to the funds until the maturity date of the investment.  CDs are generally issued by commercial banks and are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per individual.

My overall asset allocation includes a permanent allotment to cash.  So I like to get as high of an interest rate as possible on that cash.  CDs are a solid choice.

I employ a CD ladder strategy.   I hold 5 CDs each maturing sequentially in one of the next 5 years.  When the oldest CD matures during the year, I reinvest the balance into a new 5 year CD. 

I search for the best CD interest rates on a website called Deposit Accounts. Most recently, 5 year CDs had interest rates ranging from 3.0-3.5%.

US SAVINGS BONDS

US savings bonds are another great choice as an income producing asset.  They come in two varieties, series EE and series I.

Series EE savings bonds are low-risk savings products that pay interest for up to 30 years.  Series I savings bonds are also a low-risk savings product. During their lifetime, I Bonds earn interest and are protected from inflation.  Source:  TreasuryDirect

US savings bonds are backed by the US government.  But our US government is racking up tremendous amounts of debt.  Even so, it is unlikely that a saver would not get their money back when they want it.  So this is a very low-risk savings option.

Another benefit of savings bonds is tax deferral.  You do not have to pay tax on the investment income until you redeem the bond.  Therefore your income compounds tax-deferred.  This is a great option if you are in a high-income tax bracket.  Or just do not like paying taxes, like me.

Finally, I personally prefer I Bonds.  They are a great hedge against inflation.  The income paid will go higher as inflation goes higher protecting your purchasing power.  I Bonds have been yielding 2-3% in the recent past.

HIGH YIELD SAVINGS ACCOUNTS

High yield savings accounts have some similar characteristics to CDs.  They can be FDIC insured.  However, unlike CDs, they have no minimum holding period.  The saver can get his or her money whenever they want.  Because of this flexibility savings accounts usually, have a lower interest rate than CDs.

High yield savings accounts were a pretty good deal when interest rates were really low during the years after the great global recession.  A saver could park their cash and get approximately a 2% interest rate.

Current rates have not risen that much.  2.25%-2.5% is about the maximum you can get on high yield savings.  I also search for the best high yield savings rates at the website previously mentioned, Deposit Accounts.

Now that interest rates have risen again for the first time in years, money market accounts have better rates today than they have had in the past.  Let’s talk about them next.

MONEY MARKET ACCOUNTS

Similar to high yield savings accounts, the saver has access to their cash whenever they need it.  Money market accounts, however, are not guaranteed.  They are comprised of very short term, high-quality investment securities.

Money market accounts carry an asset value of $1 per share owned.  If you deposit $100 dollars in a money market account, then you are the owner of 100 shares at $1 per share.

Only in very rare circumstances does a money market account share value differ from $1 dollar.  This is called “breaking the buck”.

Even if the underlying assets in the fund do not support a $1 per share value, financial institutions that offer money market accounts will usually cover the difference.  Breaking the buck would be a huge negative for the financial institution offering the money market account.

It’s best to go with a low cost provider when selecting a money market account.  Vanguard has some great options.  Right now the Vanguard Prime Money Market Fund yields 2.5%.

INCOME PRODUCING ASSETS – BONDS

I could write an entire article on bonds since they have different characteristics, come in different variations and can be purchased through a variety of investment products.

To keep things simple, I’m going to borrow the definition of a bond from my friend GYM over at GenYMoney.  She has a talent for explaining things in really clear terms.  And recently GYM wrote an article on one specific type of bond called green bonds.

Here is GYM’s definition of a bond:

 A bond is a fixed income investment whereby an investor essentially lends money to an entity like a company, government, or project for a defined period at a fixed rate of interest.

I like simplicity and diversification when it comes to bonds.  So I like to invest in bonds through mutual funds and exchange-traded funds (ETFs).

Then I mix and match my funds to achieve a nice diversified portfolio across these bond asset categories.

• Mortgage bonds
• Floating rate bonds
• Investment grade corporate bonds
• High yield corporate bonds
• Municipal and government bonds
• International bonds

Because of the diversity in types of bonds and the risks associated with them, interest rates can really vary.  High quality, short term municipal bonds can yield as little as 1.5%.  On the other hand, speculative-grade corporate bonds can yield 6-8% and even much more.

The more risk that an investor will not get their money paid back by the borrower, the higher the interest rate the borrower must pay.  As I said early on, more risk means more potential reward.

You may not be interested in selecting individual bonds, mutual funds or ETFs.  Then take the easy route and select one well-diversified bond mutual fund or ETF that holds bonds from a number of the areas mentioned above.

PREFERRED STOCK

Preferred stock is a hybrid security that has a mix of bond and common stock characteristics.  The investor doesn’t have the capital appreciation potential like common stock.  In exchange, the investor normally receives a high dividend yield.  In addition, the holder receives preferential treatment above common stockholders on the receipt of those dividends.

Banks, insurance companies and utilities are big issuers of preferred stock.  Like bonds, you can buy individual company issues through your broker or invest through mutual funds and ETFs.

The I Shares Preferred and Income Securities ETF (PFF) is one example of a lower cost ETF with many preferred stock holdings.  It pays an attractive yield of 6.0%

MY FAVORITE INCOME PRODUCING ASSETS – DIVIDEND GROWTH STOCKS

By owning the common stock of a company, you are part owner in that business.  And, participate in all the potential rewards and risks that go with ownership.

The dividend stocks I’m talking about usually increase their dividend payments every year.  Sometimes they are referred to as dividend growth stocks.  The growing dividend helps your income keep up with inflation.

While you as the investor focus on a rising stream of dividend payments, you can be less concerned about the day to day stock market volatility.  You are getting a large piece of your investment returns in cash every quarter.

In addition, as the company raises its dividend year after year, the stock price will usually follow the upward trend.

As I mentioned earlier, dividend growth stocks achieve all three of my investment objectives.

1. Current income
2. Growth of that income
3. Capital appreciation

I prefer my dividend growth stocks with yields ranging from 3-5%.

Related: How to build a portfolio of blue chip stocks paying dividends

SUMMARY – INCOME PRODUCING ASSETS

If you are looking to add to your income-producing assets, consider these alternatives:

1. Certificates of Deposit
2. US Savings Bonds
3. High Yield Savings Accounts
4. Money Market Accounts
5. Bonds
6. Preferred Stocks
7. Dividend Growth Stocks

Disclosure

This article is not intended to be investment advice specific to your personal situation.  Invest at your own risk. You are responsible for any investment gains or losses. See this site’s Disclaimer and Privacy tab.

I currently invest in all of the income producing assets mentioned in this article.