Volatility is back in the U.S. stock market and the crypto market, with many blue chip stocks and top cryptos well off their highs.
Investors looking for the best way to achieve their 2022 financial goals would probably be happy with a 6% return. After all, a 6% return compounded over 12 years doubles your money. Here are three strategies for getting at least a 6% return in 2022.
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1. A basket of high-yield dividend stocks
A classic way to earn passive income is by investing in high-yield dividend stocks. Certain companies have a track record of paying and raising their dividends over time by supporting them with free cash flow from the business. In fact, some companies, such as pipeline giant Kinder Morgan (KMI 3.62%), have made it clear that they intend to foster shareholder value primarily through the dividend, not necessarily through the stock going up.
Equal parts of Kinder Morgan, defense giant Lockheed Martin (LMT 1.79%), integrated oil major Chevron (CVX 1.71%), and telecommunications titan AT&T (T 0.21%) would give an investor a yield of roughly 6%. The advantage here is that instead of investing in just one stock with a 6% yield, an investor is able to diversify into four different companies across four different industries. Of course, you can choose a basket of stocks to suit your interest and what you want to invest in. This is just one example. But the takeaway here is that there are plenty of attractive high-yield dividend stocks out there to customize into an assortment that's right for you.
2. High-yield stablecoins
A new way to generate passive income is through what are called stablecoins. Stablecoins are simply tokenized versions of a U.S. dollar that provide liquidity and stability to crypto exchanges. Certain stablecoins, such as USD Coin (USDC -0.01%) are backed by real dollars held in banks. You can buy USD Coin for $1. Certain exchanges will offer high interest rates for these coins. For example, BlockFi offers a 9% annual percentage yield (APY) on the first $40,000 of USDC or GUSD and an 8% APY for any amount after that.
The catch is that there is no Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insurance. There aren't as many regulations. And there's the uncertainty of the firm itself getting into risky lending practices and going belly up. The interest rate isn't high because the exchange is feeling generous. Rather, it's high because the exchange believes it can earn a higher return by using that cash for other lending practices.
Gemini offers up to 8.05% APY on its stablecoin, Gemini Dollar (GUSD 0.10%), through its Gemini Earn account. Gemini claims that its stablecoin is always redeemable for $1 at Gemini and that its GUSD reserves "are eligible for FDIC insurance up to $250,000 per user while custodied with State Street Bank and Trust." Yet read the fine print, and we see that Gemini says that "FDIC insurance applies only to the USD reserve funds. GUSD exist as ERC-20 tokens on the Ethereum (ETH 1.53%) blockchain; tokens are under the user's self-custody, and are not insured through Gemini." In short, Gemini's reserve funds in cash and cash equivalents may be subject to FDIC insurance, but your and my Gemini Dollars wouldn't be.
Nothing in this world is free. Folks interested in crypto without the volatility of Bitcoin (BTC 2.88%) or Ethereum may be interested in high-yield stablecoins so long as they understand the nascent industry has its risks.
3. A basket of interest-paying cryptos
It may surprise you to learn that most exchanges pay interest on well-known cryptos like Bitcoin or Ethereum. You can think of the interest rate like a dividend yield. For example, BlockFi pays a 4.5% interest rate on the first 0.1 Bitcoins held in its interest account and 5% APY on the first 1.5 Ethereum. It's the same concept explained in our stablecoin discussion. Only this time, Bitcoin and Ethereum are used as collateral instead of cash. And because Bitcoin and Ethereum are riskier and more volatile than cash, the interest rate is lower on these cryptos than a stablecoin like USD Coin or Gemini Dollar.
As an example, you could invest roughly $14,000 on BlockFi into equal parts Bitcoin, Ethereum, and USD Coin or Gemini Dollar and earn a 6.2% interest rate while gaining all the upside from Bitcoin and Ethereum. This strategy can be a great way to earn passive income on crypto and not feel the need to get sucked into all the noise and volatility that is common in the space.
Passive profits in a way that's best for you
A 6% yield from a single security isn't hard to find, but it can be risky. Getting creative by taking advantage of a basket of high-yielding stocks or interest-paying cryptos provides passive income while keeping you invested. Risk-averse investors may prefer to sacrifice the upside of Bitcoin and Ethereum by just investing in stablecoins. Investors that don't want anything to do with crypto are probably best served by sticking to stocks. Ultimately, the best strategy depends on your personal financial goals and what kind of exposure you want to certain markets.
