Several years ago, office supplies retailer Staples aired TV commercials featuring an “easy button.” These commercials included individuals faced with challenging tasks who pressed a button to make them easy to accomplish.
Unfortunately, there isn’t an easy button in real life. However, some things that seem overwhelming can be simpler than you might think.
For example, generating significant amounts of passive income could seem like an unattainable goal. But it doesn’t have to be. Here are five simple steps to make $50,000 in passive income per year.
1. Save — a lot
To be able to make passive income, you’ll have to save money. And to earn $50,000 annually in passive income, you’ll have to save a lot.
Saving can be difficult for many people. If you get started early, though, it’s much easier. Not only does saving become a habit, the power of compounding over a longer period of time also enables you to accumulate a lot more money.
How much will you need to save to make $50,000 in passive income per year? It depends on the amount you earn from your investments. If you only make 3% per year, you’ll need around $1.67 million to make $50,000 without touching your principal. However, if you can make a 7% return, your required savings would be under $715,000.
Accumulating $715,000 isn’t an impossible task. Let’s say you socked away the maximum contribution allowed for an IRA (currently $6,000 excluding catch-up amounts) each year. If you obtained the historical average stock market return adjusted for inflation of around 7%, you would reach the goal in a little over 33 years.
2. Buy high-yield dividend stocks
Can you really earn 7% per year from your accumulated savings? Absolutely. Arguably the best place to start is buying high-yield dividend stocks.
Obviously, you’ll want to look at the dividend yield for any stock you purchase. It’s also important to evaluate the underlying business. Make sure that the company appears to be in a solid position to continue paying dividends over the long term.
There are several stocks that meet these criteria. Medical Properties Trust (NYSE: MPW) stands out as one of the best high-yield dividend stocks, in my opinion. It currently offers a dividend yield of more than 8%. The company owns a diversified portfolio of hospital properties. Medical Properties Trust is strong financially and continues to expand.
3. Buy preferred stocks
The next step on your path to passive income is to buy preferred stocks. These stocks also pay dividends but at higher levels than common stock. A key downside, though, is that you won’t benefit from the equity appreciation that common stock can provide.
You have several ways to invest in preferred stocks. One is to buy individual preferred stocks. For example, Costamare has preferred shares that pay a dividend yield of more than 7.5%. The company is a leader in chartering containerships to shipping companies.
What if you don’t want to pick individual preferred stocks? No problem. You can also invest in closed-end funds (CEFs) or exchange-traded funds (ETFs) that specialize in preferred stocks.
Nuveen Preferred & Income Opportunities Fund (NYSE: JPC) is an example of a CEF that holds preferred stocks. It currently yields north of 8.4%. Virtus InfraCap U.S. Preferred Stock ETF (NYSEMKT: PFFA) is an ETF that owns preferred stocks. This ETF’s yield currently stands at nearly 8.8%.
4. Sell covered calls
Another step to boost your passive investment income is to sell covered call options on stocks. Selling (also referred to as writing) call options gives the buyer of the options the right to purchase the underlying stock at a set price.
You could research stocks to buy and then sell covered calls on them. Alternatively, you could invest in CEFs and ETFs that sell covered calls.
For example, the Madison Covered Call and Equity Strategy Fund (NYSE: MCN) sells covered calls on large-cap and mid-cap stocks. It currently yields more than 10.5%. The Global X Nasdaq-100 Covered Call ETF (NASDAQ: QYLD), as its name indicates, writes covered calls on stocks in the Nasdaq-100 Index. The ETF’s yield is 12.5%.
5. Buy high-yield bonds
The last step to making $50,000 in passive income is to buy high-yield bonds. You loan corporations or governments money when you invest in bonds in exchange for regular interest payments.
As was the case with buying preferred stock and selling covered calls, you could do your own legwork in finding bonds to buy. But you can also invest in CEFs or ETFs that hold a portfolio of high-yield bonds.
The AllianceBernstein Global High Income (NYSE: AWF) stands out as a good example of a bond-focused CEF. It currently yields nearly 8.2%. The iShares Broad USD High Yield Corporate Bond ETF is an ETF that buys high-yield corporate bonds. Its yield tops 7%.
Can you skip a step?
The benefit of following each of these five steps for making $50,000 in passive income is that you’ll have more diversification in your investments. However, you can certainly skip one, two, or even three steps if you want. The only step that’s an absolute must is the first one.
10 stocks we like better than Medical Properties Trust
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and Medical Properties Trust wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 2, 2022