Putting money to work to generate more money without having to contribute additional time and labor is the easiest way to grow wealth or create a retirement nest egg. Investment wizard, Warren Buffett, began his career while still just a sophomore in high school, thanks to implementing this kind of passive income approach.
The young Oracle of Omaha, along with one of his friends, bought a used pinball machine, which they installed in a busy barber shop. While they attended class, the machine collected coins, providing a steady stream of revenue. Of course Warren Buffett would not be a household name had he not continued to build upon that strategy, accumulating enough diversified sources of passive income to build a global financial juggernaut.
Here are two excellent ways that even the average investor in 2013 can emulate those methods and tap into money-making opportunities that grow wealth around the clock.
Dividend Reinvestment Plans
Returns on most savings instruments are paltry because interest rates are at all-time lows. But many people are moving that stagnant cash into high quality dividend stocks with great results. These shares offer the chance to benefit from stock price appreciation plus dividend income. Stalwarts, including Johnson & Johnson, Coca Cola, 3M, and Procter & Gamble, for instance, have paid dividends for the past 50 years, and have increased dividend payouts for 25 years or more.
Most companies offer free reinvestment programs, too, where shareholders have dividends automatically reinvested to purchase additional shares without paying brokerage fees. This helps to compound the earnings. A study conducted by Ned Davis Research showed that between 1972 and 2009, dividend stocks churned out average annual returns of more than 8.5 percent, versus less than one percent for stocks that did not pay dividends.
It is important, however, to buy shares that represent legitimate value. Sometimes an unusually high dividend, for example, is a telltale sign a company is on shaky financial footing and is using the lure of dividend payouts to attract investors.
Rental property has long been one of the most popular ways to create a passive revenue stream. Tenants essentially pay the mortgage for owners who enjoy equity appreciation. In today’s economy, rental prices are skyrocketing, too, because of increased demand in the wake of the foreclosure crisis that saw a migration away from home ownership into the rental market.
Another advantage is that responsibilities, such as screening tenants, collecting monthly payments, and overseeing property upkeep, can all be delegated to a professional Realtor or management company. Those related fees usually qualify as tax deductible business expenses, too, adding another fringe benefit to further enhance net returns. As Philip Holthouse of the accounting firm Holthouse Carlin & Van Trigt explained in a recent Los Angeles Times article, passive investors often deduct utilities, insurance, mortgage interest payments, maintenance, repairs, advertising costs, and management fees.
Yet, H&R Block cautions taxpayers not to let the promise of tax savings lure them into risky investments in untested passive income generators. Plenty of people chase after questionable ventures, for example, because they want to capitalize on lower taxes by racking up business losses. In the end, they wind up reaping plenty of deductible losses but fail to turn a profit.