Top 5 Income Producing Assets Ranked

2010 June 9
by Kyle Bumpus
from → Passive Income

Passive income is all the rage these days.  Don’t want to work?  No problem.  Just spend a little time building a few residual income streams and you can retire rich on the beach in no time!  Of course, it’s not quite that simple.  None of the following income generating opportunities are true set-it-and-forget-it money making opportunities in the true passive income tradition, but some of them do come close.

As an aside, I love these “best of” articles.  Why?  Because since it’s my site and my opinion, “because I said so” is actually a reasonable argument.  Today, I will be ranking the top 5 income producing assets ranked in descending order.

The 5 Best Income Producing Assets

5.) Real Estate

When most people think of passive income, they traditionally think about real estate.  Rental properties, the theory goes, are a great source of passive income since the tenants pay you to own real estate!  Oh, if only that were true.  In reality, real estate isn’t all that passive as a general rule.  You may not end up routinely fixing a clogged toilet at 4 in the morning (then again, you might) but you will almost certainly have to perform semi-regular maintenance on your properties.  What’s more, you’ll have to fill vacancies, paint and perform repairs between tenants, and even hunt down the occasional late rent check.  That’s not to say real estate investing can’t be immensely rewarding;  it can.  That the majority of American millionaires supposedly got that way via real estate is no fluke.  It’s just that, if making money without working for it is your goal, real estate probably isn’t your cup of tea.  Note: REIT mutual funds are an exception to this rule and I think everybody should own one.

4.) Blogging Income And Internet Marketing

Plenty of people are obsessed with making money on the internet but let me tell you, it ain’t easy.  I’ve been at this about 5 years now (only seriously for 2 years, though) and I’m still not at the point of generating a full-time livable income from it, although I’m getting close.  That said, the internet is still young enough that online money making opportunities are not difficult to find if you know how to find them.  Don’t expect to retire this time next year, but if you work intelligently and consistently at it for 4 or 5 years I see no reason why you couldn’t easily make 6 figures online.  For an older example of how I have made money online in the past, check out my posts on creating online passive income and my niche mini site case study.  I no longer use this method myself because I have since found more lucrative methods, but it does work and is a great way for beginners to learn the ropes.

3.)  Bonds And Bank Certificates Of Deposit

It would be difficult to think of a more boring investment than a high yield CD, but when it comes to your money, the less excitement the better.  Short-term investment-grade bonds and FDIC-insured CD’s are safe, convenient, and as close to a sure thing as you’re likely to get these days (one worries even about treasuries lately) but their downsides should be obvious:  relatively low yields and no inflation protection.  If you invest $1,000 in a 5 year CD, you will get back exactly $1,000 in 5 years.  Meanwhile, the cost of living will have gone up, maybe significantly.  That’s why I really prefer:

2.) Income-Oriented Mutual Funds

There are literally hundreds of decent income-focused mutual funds out there (most balanced funds qualify).  Vanguard Wellesley Income, Vanguard Equity Income, even Vanguard STAR Fund are just a few of the best income producing mutual funds I recommend (because of their low cost, of course).  The really cool thing about these income funds is that if they contain stocks, they have built-in inflation protection.  Since corporate earnings tend to rise over time with inflation, so to do corporate dividends.  Thus, provided you don’t spend down principal, you should get a modest raise most years.  Can’t beat that.

And The Best Income Producing Asset Is…

1.)  Immediate Annuities!

Okay, this one is totally a cop-out and they aren’t for everybody, but you can’t deny immediate annuities are among the best income producing investments around once you’ve reached retirement age.  Why?  Because you get a guaranteed monthly income stream and what’s more, you get to know what it will be before buying.  Yields on immediate annuities are usually significantly higher than bonds, CDs, or practically any other income-producing asset.  The downsides are that you have to pay extra for inflation protection and are exposed to non-trivial financial risk if your insurance company goes bankrupt.  I would advise anyone considering an immediate annuity to split their money amongst at least 2 or 3 different insurers to hedge that risk and remain below your state’s annuity protection limits since most states have an FDIC-like guarantee for income annuity products:  find out what yours is.

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6 Responses
  1. 2011 February 18
    Vern Urlacher permalink

    You gotta be kidding, annuities? Here is the problem. First the insurance companies who sell these things write the rules. They will give you a guaranteed fixed income stream which is like a reverse mortgage, interest and principle. The problem lies in the interest rate you will receive. Anyone who knows anything about the impact of inflation, and if you want a safe bet, bet that inflation is coming. Don’t use the numbers the government feeds you but use real numbers like how much your gas bill, grocery bill tax bill etc. is going up. Your income stream from annuities will leave you so far behind you’ll soon be greeter at Walmart if they’ll hire you.

  2. 2011 February 19

    For the record, you can buy inflation-indexed annuities. That’s what I would recommend if you were planning on drawing an income for a long time to come. But immediate annuities have many, many other uses. For instance, you could buy a 5-year period-certain annuity if you needed one, in which case inflation would probably not be an issue. The interest rates paid on immediate annuities tend to be significantly higher than anything else you can get on the market for comparable risk because they expect many annuitants to die early. I still say they are one of the best choices available if you have a low risk tolerance.

  3. 2012 February 20
    Xander permalink

    Understandably, annuities provide fixed income over a long term, however these are fixed income products designed by insurance actuaries which account for life expectancy, inflation, and other market factors. This means that annuities payout a fixed rate with a yield less the premium charged by the insurance company.

    Income oriented Mutual funds is along the right track, as you get a defined yield. But annuities is a horrible way to go as the yield on them is significantly less and you also have mortality risk on the owner side. I’ve worked in the insurance industry and handled these products in the past.

    I’d advise that you not suggest annuities as a “top” income producing asset, especially if you are not a financial adviser. This is just not sound advice for investors.

  4. 2012 February 20

    Xander, could you explain why annuities aren’t sound investments? Of course there is mortality risk on the owner side. That’s the entire reason for buying one: to manage mortality risk.

  5. 2012 October 6
    Chaz permalink

    Vern Urlacher and Xander, let me help you here… Annuities have become one of the best types of self funding pension tools, for several reasons… the main aspect is that you have the ability to transfer the risks of retirement needs from you to the insurance company. Because you will get a guaranteed interest or the returns of whatever investment you are in, which ever is higher! NO other investment out there will allow you to do that. With that being said, you will be given a guarantee growth rate and a guaranteed income for life (cannot out live your money), oh and some companies give you the option to protect against inflation… To give a final kick to an annuity and dismiss your comment about, “they are like reverse mortgages…” When a person passes away, some annuities also allow to return the initial invested amount. For example, I put in 100k, I draw down 99,999 my beneficiaries get 100k as a death benefit OR whatever the highest attained value the annuity rached before I started taking income. For the record reverse mortgages are not bad at all, it has the potential to be a resourceful tool if needed at retirement… Closed End mutual funds can a good source of income as well, I agree. All these options (Annuities, Bonds, REITS, MFs, etc…) can be a good resource, however it all depends where an individual is at and what their exact needs are. But just to sell something, just because you get a “higher” commission is not the right thing to do by any means. Unfortunately some advisors “sell” a product and not aware of other resources available.

    Kyle good article…

  6. 2012 November 10
    Mike permalink

    This would be like taking marital advice from your single or divorced cousins! They act like they want you to succeed but they don’t know what they are talking about!

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