Passive income ideas

Most self-made millionaires generate their income from multiple sources. In fact, most millionaires have at least three income streams, according to a 2018 CNBC article detailing a study on the habits of the rich.¹

Multiple income streams reduce reliance on a single income source. For most people, that’s their job, which is why multiple income streams can provide a safety net against job loss.

An income-producing portfolio is crucial for beginners looking to maximize their investments, as it offers a consistent cash flow that can supplement their regular earnings. Your portfolio’s potential can extend beyond just capital gains. Here are four legitimate ways to earn income from your portfolio.

1. Dividend stocks

Dividend stocks are company shares that return a portion of their profits to shareholders through dividends. These payments typically occur quarterly and can provide a regular income stream for investors. Here’s how dividend stocks contribute to earning income from your portfolio:

• Regular income. Dividends offer a predictable source of cash independent of stock price movements.

• Reinvestment. Reinvest dividends to purchase more shares, compounding your wealth over time.

• Stability. Companies that pay dividends are often well-established and financially stable, adding a layer of security to your portfolio.

• Tax advantages. Qualified dividends are taxed at the same rates as the capital gains tax rate, a lower rate than ordinary income tax. To be a qualified dividend, it must come from a US company or a foreign company that trades in the US. Also, you must hold the stock for a few months (more than 61 days during the 121-day period that begins 60 days before the ex-dividend date).²

• Inflation hedge. As companies grow and profits increase, dividends can also rise, helping to maintain purchasing power.

2. Fully paid securities lending

Fully paid securities lending is a way to earn extra income on stocks you own. Enrolling in a stock lending program lets your broker lend your securities to other traders or institutions. In return, you receive interest payments, which typically accrue daily and are paid monthly. The demand for borrowing your securities, often for short selling, determines the interest rate you earn.

Participating in this program doesn’t affect your ownership; you still benefit from any stock value appreciation. However, dividends paid on the borrowed shares are considered “payment in lieu” and are taxed as regular income. You also temporarily lose voting rights when your shares are on loan, and not all brokers offer a securities lending program.

3. Cash sweep programs

Cash sweep programs automatically transfer uninvested cash in your brokerage account into higher-yielding investment or savings options, such as money market funds or FDIC-insured savings accounts. This ensures that your cash balances continuously work for you, earning interest rather than sitting idle. Because brokers with cash sweep programs often have a network of partner banks they work with, cash deposits can be eligible for FDIC insurance beyond the $250,000 you’d get at one bank.

By participating in a cash sweep program, you can benefit from compounded growth on your uninvested funds, which can contribute to the overall performance of your investment portfolio. It’s a convenient and efficient way to manage cash flow and enhance income without active involvement.

4. Royalties

While royalties aren’t a typical investment option for most individual investors, the online brokerage platform Public has made it possible for regular investors to invest in intellectual property rights and royalty-generating assets. Its debut royalty asset: original music from the Shrek franchise.

Considered a form of passive income, royalties can provide steady, stable, long-term income based on the usage of these assets.

Bottom line

Generating income from multiple sources can provide a safety net in case an income stream dries up, and your investment portfolio is a great place to start. But you’ll first need to open a brokerage account. See our picks of the best brokerage accounts of 2024.

Sources

1. “Author who studies millionaires: How to create wealth like the rich,” CNBC, November 27, 2018, https://www.cnbc.com/2018/11/27/tom-corley-create-wealth-like-the-rich-with-multiple-income-streams.html
2. “Instructions for Form 1099-DIV,” Internal Revenue Service, January 2024, https://www.irs.gov/pub/irs-pdf/i1099div.pdf

About the author

Matt Miczulski is an investments editor at Finder. Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.

Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.

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