Getting your portfolio to generate income for you isn’t as hard of a task as it might sound. For as little as $7,000 invested over the course of a year, you could build yourself a passive income stream of $1,000 annually.
But it’ll take consistency, not to mention being comfortable with a good deal of risk. Here’s how to do it.
How to ratchet up your passive income
If you want to eventually generate an annual dividend income of $1,000 after consistently investing a relatively small amount of money over a relatively short period, you may need to take a few risks.
While companies can influence their dividend yields by hiking dividend payouts, or reducing the number of outstanding shares, or even (accidentally) doing things to tank their stock price, on average, it’s the market that has the largest impact on yields.
In other words, a stock with a high dividend yield relative to its competitors is likely to be riskier as investors demand higher returns for bearing greater risks. But that’s the type of stock you’ll need to invest in to have a chance of getting the financial outcome we’re discussing.
On that note, marijuana financing real estate investment trust (REIT) AFC Gamma (AFCG -0.06%) has an outrageously high forward dividend yield of around 14.4%. It pays that dividend by issuing real-estate-backed debt to cannabis companies and then passing a significant portion of its incoming interest payments on to investors. You’d need to invest roughly $6,950 to yield $1,000 in annual passive income. Therefore, if you were willing to buy around $134 worth of shares, or about 8.5 actual shares each week, you should hit your target position size in a year.
Watch for these two factors
Of course, a couple of critical assumptions are involved. First, we are assuming the share price will remain somewhat constant (in the thereabouts of $15.70 per share as of yesterday’s close) for the entire year over which the total amount is being invested. If the stock price increases for that week, the invested amount for that week goes up as well, and vice versa. The point is, you still need to buy around 8.5 shares each week, no matter which way the stock price moves.
Second, we are assuming the company will never cut dividends. Sure, dividend payouts could increase, which should help reach the stated income goal ahead of time. If, however, the company cuts dividends, then it may take much longer than a year to reach an investment amount sufficient to generate the target income. Should the stock price fall much further because of deteriorating business conditions, management may have no choice but to cut payouts. Keeping a close eye on the company’s business developments is crucial.
For most investors, parking nearly $580 per month would stretch the budget and perhaps preclude purchases of other stocks, so it might make sense to space the purchases out over a longer period and invest slightly less each week. Furthermore, it’s critical to recognize that AFC Gamma’s business model is vulnerable to downturns in the cannabis industry, as its debtors might default if they’re having trouble profitably selling marijuana. So while it’s possible to rack up dividend income very rapidly with this investment, there is a genuine possibility that its dividend might get cut when conditions get tougher.
Still, investing in companies with more reasonable yields means ramping up to hit $1,000 per year is even harder, though still possible. For example, the marijuana cultivation space REIT Innovative Industrial Properties (IIPR 1.88%) has a forward dividend yield of 8.3%, so it’d take a year of making weekly purchases of roughly $230 to reach the target.
Much like with AFC Gamma, IIP is vulnerable to a downturn in the cannabis industry, though its business model involves buying greenhouse properties directly and then getting a return on its investment from rental payments from its tenants. And while it recently reported that several of its tenants were defaulting on their rent, its ownership of valuable property makes it somewhat less risky than AFC Gamma at the end of the day, as shown in part by its lower yield.
A safer approach will take longer (and cost more too)
For most investors, it’s much less risky to build a base of passive income by consistent purchases of low-yielding securities, like the ProShares S&P 500 Dividend Aristocrats ETF (NOBL 0.90%), which has a yield of 2.3%. With that return, you won’t be making $1,000 in passive income within a year unless you’re affluent enough to drop more than $836 weekly, but over a four- or five-year period of making a much smaller recurring investment, that’s entirely attainable.
And, as the ETF is composed of only businesses that have a long history of paying and hiking their dividends, there’s much less risk for investors. Even if one of the ETF’s components has a problem that requires slashing the payout, the others likely won’t, and shareholders might not even notice any difference.
So if you’re patient, it’ll be a much more stable source of revenue for your portfolio than either of the other two stocks discussed here, and you won’t need to worry about the gyrations of the cannabis industry impacting your cash flow either.