One of my top financial goals is to eventually generate enough passive income to offset my recurring expenses. That way, I won't have to rely on my active income from working to pay the bills. It will give me a lot more freedom, financially and with my time, to pursue other things.
While I have a long way to go, I plug away at this pursuit as I have spare cash to invest. I focus on investing in companies and funds that generate an above-average income stream that should grow over time. That strategy is leading me to load up on JPMorgan Equity Premium Income ETF (JEPI -0.20%) and W.P. Carey (WPC 0.21%). Here's why I keep buying these two passive income machines.
Built to generate income
JPMorgan Equity Premium Income ETF is an exchange-traded fund (ETF) with a dual mandate. It aims to make monthly cash distributions to investors. In addition, it seeks to provide equity market exposure with less volatility compared to the broader market.
The ETF primarily generates income by writing out-of-the-money call options on the S&P 500 index. This strategy generates options premium income the fund distributes to investors each month. Last month's distribution payment had a 7% annualized yield, while the payments over the trailing 12 months put its annualized dividend yield up around 8%. That's around what investors could have earned by investing in high-yield junk bonds:
Image source: JPMorgan.
While this ETF currently offers a high dividend yield, the payment does fluctuate from month to month. It rises and falls with the options premium income it generates, which ebbs and flows with volatility.
The other thing I like about this ETF is that it offers a higher total return potential than a fixed-income investment because of its equity market exposure. It invests in a defensive portfolio of stocks hand-selected by its management team based on proprietary risk-adjusted stock ratings. The equity portfolio currently holds shares of over 100 financially strong companies. This equity portfolio should grow the ETF's value over the long term, growing my wealth in the process.
Passive income from real estate
W.P. Carey is a real estate investment trust (REIT). It owns a well-diversified commercial real estate portfolio crucial to its tenants' operations. Its primary focus is owning single-tenant industrial, warehouse, and retail properties in the U.S. and Europe. It signs long-term net leases with high-quality tenants that feature built-in rent escalations. They provide the REIT with steadily rising rental income.
The company aims to pay out 70% to 75% of its income to investors in dividends each year. It currently pays an attractive dividend that yields nearly 6%.
W.P. Carey had steadily increased its dividend over the years. However, last year, it completed a major portfolio and payout reset. The company spun off or sold most of its office properties to focus on sectors with better long-term growth prospects, like warehouse and industrial. As part of that strategic shift, W.P. Carey also reset its dividend to reflect its lower income and desire for a lower dividend payout ratio.
This strategy shift should pay off over the long run. The company plans to recycle the sale proceeds into warehouse and industrial properties. It also plans to reinvest its retained cash flow after paying dividends into these property classes. The REIT's expanding portfolio of properties with better long-term growth prospects should enable it to grow its adjusted funds from operations (FFO) at a higher rate over the long term. That will allow W.P. Carey to increase its dividend, which it sees rising at around the same rate as its FFO. It should supply me with a steadily growing passive income stream and appreciation potential as the REIT's stock price rises with its earnings.
Income with upside
JPMorgan Equity Premium Income ETF and W.P. Carey should supply me with lots of passive income in the future. They also should provide me with some equity upside, which will help grow my wealth over the long term. That one-two punch of healthy income and long-term upside potential drives me to continue loading up on their shares.
