By definition, passive income doesn't require much involvement on your part. However, there's a catch. To generate a significant level of passive income typically requires a lot of work to accumulate enough money initially.
Let's suppose that you've built up $1 million. That's the threshold that many Americans view as the magic number needed to retire comfortably. And the number of retirement-plan millionaires is higher than ever. Even with that amount, though, you'll probably find it more difficult than you'd like to generate enough passive income to maintain your standard of living.
But it's not impossible to achieve your goal if you have $1 million saved up. Want $75,000 or more in passive income the easy way? Here's where to invest.
An underappreciated alternative
Three top ways of generating passive income are investing in real estate, bonds, or dividend stocks. Each option has some drawbacks, though.
Making money in real estate often requires more-active involvement than anticipated. With real estate prices soaring in recent years, there's also the possibility that you could have to pay more than you'd like.
Generally speaking, bond yields aren't very attractive right now. Stock dividend yields aren't all that great, either, for the most part. For example, the average yield for the S&P 500 is only 1.3%. Your initial $1 million won't make much passive income at that level.
However, there is an underappreciated alternative that can significantly boost your passive income. Closed-end funds (CEFs) are a special type of mutual funds that can be traded on a stock exchange like an exchange-traded fund (ETF).
Passive income the easy way
Most investors don't have the expertise to identify the best corporate bonds or preferred stocks to buy (nor the access to purchase the securities, in many cases). Most investors are also unwilling to put forth the effort needed to turbocharge their income through covered-call strategies, which involve selling call options on the stocks they own.
Investing in CEFs, though, enables you to put investment managers to work on your behalf who have the expertise to pursue these types of approaches. And these funds can generate impressive passive income for you without any effort on your part.
As a case in point, let's look at spreading $1 million across four CEFs run by reputable companies with strong track records. Three of these CEFs, by the way, are currently available for purchase at a discount to their net asset values (NAVs).
The AllianceBernstein Global High Income Fund (AWF -0.10%) currently pays a yield of 7.51%. An investment of $250,000 would give you $18,775 per year. This CEF focuses primarily on high-yield bonds.
You could make another $17,925 annually by investing $250,000 in the Nuveen Preferred & Income Securities Fund (JPS). This CEF offers a current yield of 7.17% and owns bonds, common stocks, and preferred stocks.
The New America High Income Fund (HYB 0.73%) yields 7.62%. A $250,000 investment in the CEF would provide $19,050 in annual passive income. This fund focuses primarily on high-yield bonds.
Investing the final $250,000 of your initial $1 million in the Eaton Vance Tax-Managed Buy-Write Income Fund (ETB 1.05%) would generate $19,825 in income per year. This CEF uses a covered-call strategy that boosts its yield to 7.93%.
The annual passive income generated from investing $1 million spread equally across these four CEFs totals $75,575. And you won't have to lift a finger to make that money after your initial purchases of the funds.
A couple of things to consider
You don't have to limit yourself to the four CEFs mentioned above. There are other CEFs that offer similar yields as these, and they focus on the same types of assets. However, there are a couple of things to consider with any CEF.
First, the work that the investment managers of these funds perform doesn't come free. All CEFs charge annual expense fees. The fees for the four CEFs above range from around 1% to 1.5%. Buying the funds at a discount to their NAVs, though, helps provide a cushion for these expenses.
Second, many CEFs, including those referenced earlier, use leverage. While this helps boost returns and yields, it can also significantly increase the volatility of the funds.
Still, it's quite possible to make $75,000 or more annually on an initial investment of $1 million in CEFs. This easy approach to generating passive income could be just what some investors are looking for.