Build Passive Income With Equity Income Funds

Passive income is the goal of pretty much everybody.  How great would t it be great to receive a paycheck month after month without having to do any actual work for it?  This may sound like a pipe dream to many.  Sure, if you have a few million dollars to invest it’s easy to generate a livable income without working, but what about the rest of us?  As it turns out, the recent market dive has given even small investors an opportunity to earn a decent amount of dividend income using high-yield or equity income funds.

Get Paid Without Lifting A Finger

Of course, there are various levels of passive income.  Some forms of passive income require absolutely no effort on your part once you get them set up (like equity income funds) while others require at least a moderate on-going effort (like blogging).  As far as passivity of income goes, mutual funds are among the very best sources from which to derive an income.  You simply pay a professional to manage your money and send you quarterly dividend checks in the mail (or even better, direct deposited in your high-yield savings account).

Vanguard Equity Income Fund Now Yielding 5%

Recent market turmoil has raised dividend yields to levels not seen in quite some time, presenting huge opportunities for dividend-hungry investors looking to supplement their income. If ever there was a time to shop around for a dividend-focused mutual fund, now is the time.  According to Morningstar (sign up for a free Morningstar membership), Vanguard’s Equity Income Fund (VEIPX) is now yielding just at 5%, which is the highest I’ve seen it in years.

Now I know what you’re thinking:  even at 5%, I’d have to invest over $1 million to generate enough money to live off of.  That’s true, but you’re missing the point.  Just $20,000 invested at 5% yields $1,000 per year.  Could you use an extra $1,000 per year, every year, no matter what?  I sure could.  Similarly, just $50,000 would yield $2,500.  While $50,000 isn’t chump change, I don’t think it’s an unrealistic amount for most serious investors to have saved up, either.

The best part of equity income funds and the main advantage they have over bond funds is that dividend payments tend to rise over time in lock-step with earnings.  So while you may only earn $2,500 the first year, you will probably earn more and more every year after that.  As an example, let’s plot out future expected dividend income assuming a $50,000 initial investment (yielding $2,500 in dividend income in the first year) and 5% real earnings and dividend growth per year (which is the long-term average).  Note that real returns are net of inflation, so the results are stated in today’s dollars.

After 30 years, you would be earning $11,169 dollars (net of inflation, remember) every single year from an initial $50,000 investment.  That’s almost $1,000 of extra income every single month!  While these numbers aren’t huge, they do illustrate the fact that even small amounts of passive income can add up to significant sums over time if allowed to compound.  A small investment in a high-quality equity income fund today will pay large dividends down the road if you’re patient.