Want to Make $100,000 in Passive Income? Here’s a Ridiculously Easy Way to Do It

Time is money. If you’re not spending your time making enough money to support your lifestyle, you’ll need to make money another way.

That’s where passive income comes into play. It puts the money you’ve already accumulated to work so that you can spend your time doing the things you want to do.

You might think that there’s no way to stockpile enough cash to invest in a way that could support a comfortable lifestyle. However, you might be pleasantly surprised. Want to make $100,000 in passive income each year? Here’s a ridiculously easy way to do it.

Image source: Getty Images.

What would it take?

The average rate for money market accounts right now is around 0.08%. You’d need a whopping $125 million to make $100,000 per year with that rate. That’s a no-go for almost everyone.

Certificates of deposit (CDs) aren’t much better. With an average rate of close to 0.32% for a 60-month CD, it would take an initial investment of nearly $31.3 million to generate $100,000 in annual passive income.

What about investing in dividend stocks? If we assume a 5% dividend yield (which is enough to be considered a high yield), $2 million upfront would be required to produce $100,000 per year. Unfortunately, this amount is also out of reach for many Americans.

But what if you could make a six-figure passive income with less than $900,000 invested? A lot of people will be able to accumulate at least that amount in their 401(k) retirement accounts by the time they retire.

The Global X NASDAQ 100 Covered Call ETF (NASDAQ: QYLD) currently offers a yield of 11.8% with a total expense ratio of 0.6%. Investing a little under $900,000 in this exchange-traded fund can generate $100,000 per year in passive income after covering expense fees.

How the ETF works

Two words in the ETF’s name reveal how the super-high yield is achieved — covered call. QYLD sells covered call options on the Nasdaq-100 Index. This index consists of the 100 largest U.S. non-financial companies that trade on the Nasdaq stock exchange.

Selling calls gives the option buyer the right (but not the obligation) to purchase shares at a set price called the strike price within a specified period. Calls are “covered” when the option seller owns the underlying shares of the asset.

QYLD has been around since December 2013. The ETF buys stocks in the Nasdaq-100 Index. It then sells covered call options on the index. And the ETF does this on a monthly basis, generating monthly income for shareholders.

South Korean-based financial services company Mirae Asset manages QYLD. Mirae also runs similar ETFs that sell covered calls on the S&P 500 Index and the Russell 2000 Index.

Easy, but…

You really could make $100,000 per year by investing less than $900,000 in QYLD. It’s an easy way to make passive income, but there are downsides that you should consider.

Perhaps most importantly, covered calls generate income but they limit the upside potential. You could potentially make a lot more money over the long term by simply buying the Nasdaq-100 stocks or an ETF that holds the stocks and selling shares as needed for income. For example, the Invesco QQQ Trust (NASDAQ: QQQ) ETF, which tracks the Nasdaq-100 Index, has trounced QYLD in total returns over the past 10 years.

QYLD Total Return Price data by YCharts

You should also be aware that QYLD isn’t immune to steep declines. As a case in point, the ETF fell more than 25% during the coronavirus-fueled market sell-off in the first quarter of 2020. This slide wasn’t much lower than that of the QQQ ETF.

There are other simple ways to generate a significant amount of passive income that could provide more upside potential than QYLD does. However, this covered call ETF could be attractive to some investors.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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