Most people work hard for their money. That's admirable. But it's also smart to let your money work hard for you.
Some avenues for putting your money to work can be super complicated. There are less complex approaches, though. Here are two simple ways to make $40,000 in passive income.
Image source: Getty Images.
1. Invest in dividend stocks
One easy way to generate passive income is to invest in dividend stocks. You'll want to evaluate three key factors with any dividend stock before buying:
- Dividend yield
- Sustainability of the dividend
- Risk that the stock could decline significantly
The higher the dividend yield of a stock is, the greater your passive income will be. The following table illustrates this with three dividend stocks:
| Stock | Dividend Yield | Initial Amount Required to Make $40,000 |
|---|---|---|
| Johnson & Johnson(NYSE: JNJ) | 2.88% | $1.39 million |
| Enterprise Products Partners(NYSE: EPD) | 7.37% | $542,741 |
| Omega Healthcare Investors(NYSE: OHI) | 10.24% | $390,625 |
Data source for dividend yields: Google Finance. Table created by author.
You wouldn't need nearly as much money to make $40,000 in passive income by investing in Omega Healthcare Investors as you would with Johnson & Johnson. However, it's important to also consider the sustainability of those dividends.
Skilled nursing facility operators who represented around 10% of Omega Healthcare Investors' annualized rent and mortgage obligations didn't fully pay what they owed in the fourth quarter of 2022. Since then, the healthcare REIT has either restructured or deferred payments for three other tenants. Because of this, there is an elevated risk that Omega Healthcare Investors won't be able to continue paying dividends at current levels.
Johnson & Johnson, on the other hand, is a healthcare giant with a strong financial position. The company is a Dividend King with 61 years of consecutive dividend increases. Most investors would consider J&J's dividend to be highly reliable.
Enterprise Products Partners is a good example of a high-yield dividend stock with a dividend that appears to be sustainable. The midstream energy company has increased its distribution for 24 consecutive years.
There's a possibility that any stock -- including J&J, Omega Healthcare Investors, and Enterprise Products Partners -- could decline significantly over the short term. J&J appears to be in the best position of these three stocks to deliver positive long-term returns with its expertise in developing and marketing pharmaceuticals and medical devices.
You can find plenty of other stocks with dividends that are in the ballpark of these three examples that could enable you to make $40,000 in passive income. Evaluating their yields, dividend sustainability, and risk will help you select the best alternatives to put your money to work.
2. Invest in bonds
Another simple path to generate passive income is to invest in bonds. With bonds, you loan your money to a government or corporation with the expectation to receive your full amount back plus interest. Factors to look at closely with bonds before buying include:
- Yield
- Maturity length
- Risk level
As is the case with dividend stocks, the higher the bond yield the greater your passive income will be. The following table shows three examples of bonds:
| Bond | Current Yield | Initial Amount Required to Make $40,000 |
|---|---|---|
| U.S. 1-Year Treasury Bond | 4.618% | $866,176 |
| American Tower 5% 2/15/2024 Note | 4.994% | $800,961 |
| Diversified Healthcare Trust 9.75% 6/15/2025 Senior Unsecured Note | 10.078% | $396,904 |
Data source for yields: TD Ameritrade. Table created by author.
You can usually get higher yields from corporate bonds compared to Treasury bonds or municipal bonds. However, the risk levels are also higher. The financial strength of the issuer makes a big difference in the yield and the risk level.
Also, holding bonds with greater maturity lengths could lock you into a lower yield than you could get at a later point. And if you need to sell the bond before it matures, you could lose money.
One way to reduce your risk is to invest in bond funds. These funds usually own a basket of bonds with different maturities. Keep in mind, though, that different bond funds have different risk levels.
The $40,000 question
Can you really make $40,000 in passive income? The answer is "yes" -- but it hinges on how much you have to invest and how much risk you're willing to take on.
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Keith Speights has positions in Enterprise Products Partners. The Motley Fool has positions in and recommends American Tower. The Motley Fool recommends Enterprise Products Partners and Johnson & Johnson. The Motley Fool has a disclosure policy.
