There are lots of ways to generate income. Obviously, you can work for an employer. You could run your own business. You can freelance. But all of these require an active, ongoing effort on your part.
On the other hand, passive income doesn't require you to work. It puts your money to work for you. Granted, you'll probably have to put in your dues to build a large enough amount to generate significant passive income.
Some methods of producing this kind of income can be relatively complicated. But not all of them. Here are three simple ways to make over $50,000 in annual passive income.
1. Invest in high-yield dividend stocks
Probably the most popular way of generating passive income is investing in high-yield dividend stocks. Definitions of exactly what dividend yield threshold qualifies as high can vary. However, most investors would probably agree that 5% is a high yield.
If we use that level as a benchmark, it would take an initial investment of $1 million to produce $50,000 in annual dividend income. That might seem like an unreachable level to some. The good news, though, is that many Americans will be able to accumulate $1 million or even more by the time they retire.
It isn't difficult to find dividend stocks with yields of 5% or higher. There are more than 800 of them trading on U.S. stock exchanges right now.
You'll definitely want to research the stocks before buying, though, to make sure the underlying businesses are strong enough to keep the dividends flowing. I think that investors should take a look at two high-yield dividend stocks, in particular.
Medical Properties Trust (MPW 0.23%) is a real estate investment trust (REIT) that focuses on owning and leasing hospitals. Its dividend yield stands at nearly 6.6%. The company owns close to 440 properties in the U.S. and nine other countries. Medical Properties Trust's business is solid and diversified across 53 tenants.
Enterprise Products Partners (EPD -0.36%) is a midstream energy company with a distribution yield of 7.1%. The company has increased its distribution for 23 consecutive years. Enterprise owns more than 50,000 miles of pipelines that transport natural gas, natural gas liquids, crude oil, and petrochemicals. It's thriving with the current market dynamics and should have solid long-term growth prospects as well.
2. Invest in closed-end funds
I firmly believe that closed-end funds (CEFs) are an underrated alternative for generating passive income. A CEF is a special type of mutual fund that doesn't issue new shares (hence the "closed-end" part of the name). Unlike standard mutual funds, though, you can buy and sell CEFs like a stock.
The yields available from CEFs vary. However, you won't have any problems finding quite a few with yields of 7% or greater. Keep in mind that CEFs charge annual expense fees. But the best ones are well worth the price because you gain access to top-notch investing managers who continually search for the best sources of income.
A couple of CEFs you might want to check out are the AllianceBernstein Global High Income Fund (AWF -0.38%) and the Nuveen Preferred & Income Securities Fund (JPS). The former's yield currently stands at nearly 7.7%, while the latter's yield tops 7.3%. An initial investment of $685,000 at those rates would provide more than $50,000 per year in income.
The AllianceBernstein CEF primarily owns corporate bonds with some government bonds in the mix as well. The Nuveen CEF invests in bonds, common stocks, and preferred stocks. Both funds are currently available at a discount to their net asset values (NAVs), which is the value of the funds calculated by subtracting all liabilities from the market value.
3. Write covered calls
You can also generate significant passive income by writing covered call options on stocks. This approach does involve a little work on your part, though, so it's not as simple as the other two methods mentioned.
The basic idea is to sell call options on shares that you already own. How much additional income you make will depend on several factors, including how far in the future the option expires, the strike price, and the level of volatility. You will need to own 100 shares for each call option that you sell, though, since each call option gives buyers the right to purchase 100 shares.
If this sounds too complicated to you, there are easier options available. You could buy a CEF or an exchange-traded fund (ETF) that writes covered calls.
For example, the Global X Nasdaq 100 Covered Call ETF (QYLD) writes monthly call options on the Nasdaq-100 Index. Its yield currently stands at 11.8%. The ETF's expense ratio is 0.6%. An investment of less than $447,000 would provide more than $50,000 in passive income per year.
Sure, the performance of this ETF has lagged well behind its underlying index over a multi-year period. But it's less volatile and -- most importantly -- gives you an impressive monthly income stream.