Today I am going to look at five income-generating assets that are actually worth owning.
A good book has a lasting impact. It could be an idea, insight, or titbit of wisdom that stays with you.
And every once in a while, you’ll read a book that delivers a message so powerful, that it changes your behaviour.
Rich Dad Poor Dad was one such book for me.
The simple story of a boy with two dads – one his real dad (a broke teacher) and the other a fatherly figure (a wealthy and successful businessman) – wasn’t all that entertaining, but the lessons shared were profound:
“Rich people buy assets that generate income. Poor people buy liabilities that they think are assets (big homes, cars, toys).
Assets put money into your pocket; liabilities take it out”.
These lessons shifted my perspective.
They’ve guided my behaviour and attitude towards money ever since.
A decade since reading Rich Dad Poor Dad, I still make it a priority to save some of what I earn and invest it in income-producing assets.
Investing for income is the quickest way to build sizeable passive income.
BUT, not all investments that pay an income are worth owning – I’m looking at you, savings accounts.
In this post, I’m going to share my top five income-generating assets that are actually worth owning.
Let’s get into it…
1. Dividend Paying Exchange Traded Funds (ETFs)
Established businesses reward their shareholders by sharing some of the profits in the form of a dividend.
Dividends are a fantastic source of passive income as you get paid by a business without having to deal with the headache of running it.
But that doesn’t mean you get to put your feet up.
As a diligent investor – which you are, aren’t you? – you’ve still got to monitor the companies that you invest in to ensure your dividend is safe.
That means keeping on top of company and market news, reading annual reports, studying balance sheets, and researching competitors.
Sound like a lot of work?
That’s because it is. Researching stocks requires upfront and ongoing time and effort. But there’s an easier way: high-dividend yield ETFs.
These funds hold a basket of shares that often pay above-average dividends.
If a stock’s dividend is cut or the yield drops below the threshold, it will be removed from the fund, and another company will replace it.
This means you get to share in that sweet, sweet profit without your ongoing time investment. #Winning
And as these funds often take a passive management approach, their ongoing charge is low. #WinnningAgain
2. Peer to Peer (P2P) Lending
I’ve been investing in peer-to-peer lending for about three years.
If you’re not familiar with P2P lending, it’s where you lend to individuals or businesses directly through the help of a platform.
In exchange for lending your money, the borrower will pay you a healthy return on your loan every month.
This trumps my highest paying high-interest savings account, where I’m earning a paltry 0.7% – OUCH!
Now, there are risks with peer-to-peer lending: there’s the chance the borrower defaults or the platform goes bust.
To mitigate these risks, I don’t try to pick individual loans to invest in, and I leave it up to the platform managers to do proper due diligence on borrowers.
I also only invest in established P2P platforms that have a low default history and hold an adequate provision fund.
3. Buy-to-let Property
Despite the ever-increasing taxes and legislation surrounding property investment, buy-to-let remains one of the top income-generating assets in the UK.
What makes rental property such a great investment?
CONSISTENT CASH FLOW.
You get paid every month from each of your tenants.
Of course, you’ve got mortgage payments, buildings insurance, property management and maintenance to pay, but IF you buy right, there will be a surplus of rental income to pocket each month.
A 15% return on investment is easy to achieve with a standard BTL, and returns of 50% or more are achievable using advanced strategies.
I’m a huge fan of BTL property (it makes up the bulk of my portfolio), but it does come with some downsides.
If being a landlord isn’t for you, then there’s always…
4. REITs (Real Estate Investment Trusts)
If you don’t want to invest in property directly, then you can still get the benefits of rental income and capital appreciation by investing in Real Estate Investment Trusts (REITs).
REITs are similar to stock funds, but instead of pulling investors’ money together to invest in companies, REITs invest in property.
REITs give smaller investors several advantages:
- Access to the property market without significant upfront costs – no need to save a big deposit and pay all the other “hidden” costs of property investment (legal fees, finance fees, taxes).
- They reduce risk by spreading your investment across several properties instead of having all your eggs in one house.
- They allow you to own assets that you may not otherwise have been able to afford – prime commercial property, for example.
- REITs are traded on the stock market, making them more liquid than BTL property.
- REITs offer a healthy yield of around 4-6% – One of the conditions of a REIT is that it must pay at least 90% of its rental profits to shareholders.
- Consistent income! It doesn’t matter whether property prices are going up or down, tenants still have to pay rent.
REITs are shaping up to be a pretty good investment, right?
If you’re thinking about investing in REITs, I’d consider logistics REITS – like Tritax Big Box (LSE: BBOX) or Urban Logistics REIT (LSE:SHED) – as demand for online shopping looks likely to increase.
Alternatively, the healthcare sector has always had steady demand, which I think will increase with an ageing population.
5. Online Businesses
The blogs you frequent aren’t producing content for the hell of it.
No, they’re doing it because it’s lucrative… extremely lucrative. Some of these little “hobby blogs” bank tens of thousands each month.
Two of the blogs I follow make more than £1 million a year!
And Pat Flynn, who blogs about making money online at Smart Passive Income, brings in a similarly astonishing stack every month.
In Pat’s first-ever income report (October 2008), he shared how he made $7,906.55 that month.
In his last income report (December 2017), that figure had risen to $125,819.91!
That’s in A SINGLE MONTH!
I fully appreciate that these bloggers may be outliers.
But even on the low end, there are plenty of bloggers that make a full-time living online.
If you’re tech-savvy – or have a willingness to learn – you can start an online business for next to nothing and create another income source.
And if you have the cash and the kahunas for it (it’s a risky venture, after all), you can buy a site that’s already making money.
Online businesses usually trade at 20x to 36x monthly earnings.
The valuation depends on quality factors such as the age of the site, its traffic sources, backlink profile, and the number of income streams it has.
But even at the higher end of the valuation, these digital income-producing assets offer returns of 33%!
If you fancy yourself as a digital entrepreneur, then Flippa has a great marketplace for picking up established online businesses.
Wrapping It Up
Financial independence – the end goal for many – happens when you have enough passive income that work becomes optional.
And the quickest route to job-replacing passive income (for most people), is to save as much earned income as possible and invest it in assets that generate income.
That’s the path I took to achieve financial independence. And the five assets in this post are what I invest in for income.
In my opinion, they provide the perfect balance of diversification, leverage, low time commitment, and high cash flow – all of which are important to me for reaching my goals.
But that’s just my two cents. If you happen to stumble upon a solid investment that pays well, please share it in the comments.