Best passive income investment to begin with

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What is the best passive income investment you can make? There are definitely options out there. Just look at our top menu to get some ideas. We have stock & bond portfolios, ETFs, real estate, digital assets, crowdfunding platforms that all have options to generate relatively stable income that is 100% passive after you make your initial investment. 

Okay, great, but what if I am new to all this? I am interested in income today. What is the best place to start?

The obvious answer for us is an easy-to-setup income portfolio. There are few reasons for that:

1) All you need is a brokerage account and little money to start.

2) Unlike real estate, it doesn’t involve the leverage required to purchase an expensive rental property or dealing with banks or mortgage brokers.

3) Opposite to specific ETFs, a well-balanced portfolio provides excellent diversification that leads not to just income but stability.

4) It is a proven option that has existed for decades compared to relatively new and not yet thoroughly tested crowdfunding platforms.

5) You also don’t need experience coding, SEO, investing in content production, and the overall skill set required to run an income-generating digital asset.

It the most straightforward way to get started. Once your income grows, it makes sense to venture into all the other mentioned investment opportunities.

How to build a passive income investment portfolio?

What do you need to get started? First, you need an account with a good brokerage with $0 Commissions that will not impose any minimums on your account. Thankfully most brokerages have that these days. 

Here are our favorites:

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Then we need to select the best ETFs for the job. Why ETFs? They will provide automated security selection and diversification we need to achieve stability—all at a manageable cost.

What are the best securities for the job?

We need to decide if we want high-income today or income growth in the future. High-income yield in the form of dividend payment as a percentage of the price we pay today will give us income right away. However, income growth means that our income will grow relative to the price we pay today.

Dividend growing companies can give us growth, while high-yielding securities today will give us income right away. So we can attempt to find a happy balance between the two.

Then we will balance three things: Equities, Fixed Income Securities (Bonds), and Real Estate Income Trusts (REITs). Within equities, we will look at international and domestic stocks and large and small companies, but all of them will have to pay a lot of dividends.

Who is this portfolio for?

Goal: Income seekers.

Risk tolerance: Low to Medium. Dividend-paying large-cap stocks and fixed income securities will be relatively lower risk. In contrast, mid-cap, international stocks, and REITs will give us slightly more risk exposure but will reward us with potentially higher income percentages.

Term: This portfolio is best for intermediate-term investors. If you are closer to retirement, it is possible that you would want more fixed-income securities in your portfolio.

Portfolio Construction

Now that we have the logic and goal in mind, let’s build. We will use the most popular ETFs with a focus on maximizing yield.

CategoryWeightTickerYieldTicker Info
U.S High Dividend20.0%VYM2.80%
U.S Mid-Cap Dividend12.5%IMCB2.53%
U.S Small-Cap Dividend12.5%DES2.06%
Emerging Markets High Dividend15.0%DEM4.46%
Long-Term Bonds15.0%BLV6.10%
High-Yield Corporate Bonds15.0%HYG4.50%
U.S REITs5.0%VNQ3.10%
International REITs5.0%DRW5.79%
100.0%3.8%

Historical Performance

Here is the summary of key stats:

This is the hypothetical return on a $10,000 investment made in this portfolio at the end of 2007.

Portfolio, like many others, has dipped in 2008 during the crisis but has quickly recovered in 2009.

The chat below summarizes price change for each ETF.

Return Breakdown

Each ETF contributes differently to the overall return, below is the breakdown of how each ETF contributed to the overall portfolio.

Asset Breakdown

What are we actually buying with the following set of ETFs. Here is the breakdown by asset class. Almost 50% is in U.S stocks and 26% in US Bonds, the rest are International assets.

Industry exposure:

Financial Services and Real Estate are the two biggest industries we buy with this portfolio at almost 40% allocation. This make sense since financial service companies and real estate typically generate the highest income yields.

Risk and Fees

Fees
This portfolio is constructed using ETFs. ETFs are professionally managed and carry a fee called MERs. This fee is part of your return so it is not charged separately. Here is the breakdown of the fees.

Risk contribution by ETF

High volatility comes from Emerging Markets and Long-Term Bonds. This is because Long-term bonds fluctuate more with interest rate changes and thus contribute to the overall portfolio volatility.

Final thoughts and next steps

This is an example of how we approach using ETFs with building a portfolio around our goals. In this scenario we can achieve a passive income investment that generates close to 4% annual income without taking on too much unnecessary risk.

However, the downside of course is to generate significant income, you will need to invest significant amount. So unlike physical real estate investing, for example, that allows you to use leverage. Leverage is of course more risky but the returns are also more significant.

Next steps should as always be further due diligence. We recommend checking out fact sheets for each of the proposed ETFs and looking into ETF alternatives to reconstruct this portfolio for yourself.

Notes on results:

Performance analysis is not of the exact portfolio offered by a 3rd party service. For back testing purposes, portfolios are reconstructed using best available information. 

Past performance is no guarantee of future results, which may vary. Please see our terms of use.

Investing involves risk, including possible loss of principal. The value of the investments and the income derived from them may fluctuate over time.

All portfolio returns presented are hypothetical and backtested. Hypothetical returns do not reflect trading costs, transaction fees, or taxes.

The results are based on information from a variety of sources we consider reliable, but we do not represent that the information is accurate or complete.

The results do not constitute investment advice or recommendation, are provided solely for informational purposes, and are not an offer to buy or sell any securities.

The results are based on the total return of assets and assume that all received dividends and distributions are reinvested.

CAGR = Compound Annual Growth Rate

Stdev = Annualized standard deviation of monthly returns

The results assume annual rebalancing of portfolio assets to match the specified allocation

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I started my professional career in the automotive industry long before electric vehicles were a thing despite Tesla already existing.

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