Unlock your financial future with income-generating assets that work for you, even while you sleep.
Investing in income-generating assets can help you build wealth over time. These assets provide consistent income while also potentially appreciating in value.
Below we explore 5 Income Generating Assets you may want to consider.
What Are Income Generating Assets?
Income-generating assets are investments that produce a steady stream of income, typically through interest, dividends, or rental payments. These include stocks that pay dividends, bonds, REITS, music royalties, and real estate.
As the name implies, income-generating assets focus on generating cash flow as opposed to capital appreciation. While capital appreciation can also occur, it’s not the primary objective of investing in these types of investments.
1. Dividend Stocks
Dividend stocks are shares of companies that regularly distribute a portion of their earnings to shareholders as dividends.
These stocks are a popular type of income-generating asset because they provide a steady stream of income, typically on a quarterly basis.
Investors favor dividend stocks not only for the regular income they provide but also for their potential for capital appreciation. Companies with a history of consistent and growing dividends are often well-established and financially stable, making dividend stocks a key component in many income-focused investment portfolios.
PROS
- Steady Income Stream: Dividend stocks provide regular income, making them ideal for passive income seekers.
- Lower Volatility: Companies that pay dividends are often more stable and less volatile than growth stocks.
- Compounding Returns: Reinvesting dividends can lead to significant compound growth over time.
CONS
- Dividend Cuts: Companies can reduce or eliminate dividends, impacting income and potentially the stock price.
- Market Risks: Dividend stocks are still subject to market risks and can lose value during economic downturns.
2. Bonds
Bonds are a type of income-generating asset where investors lend money to an entity (such as a corporation, municipality, or government) in exchange for periodic interest payments and the return of the bond’s face value at maturity.
They are considered relatively safe investments, particularly government and high-quality corporate bonds, making them attractive for conservative investors seeking stable income.
PROS
- Stable Income: Bonds provide regular and predictable interest payments
- Lower Risk: Generally less volatile than stocks, making them a safer investment option
- Diversification: Adding bonds to a portfolio can help reduce overall risk
CONS
- Lower Returns: Typically offer lower returns compared to stocks, particularly for high-quality bonds.
- Interest Rate Risk: Bond prices can fall if interest rates rise, as newer bonds may offer higher yields.
3. REITS
REITs must distribute at least 90% of their taxable income to shareholders as dividends making them attractive to income-focused investors. The income-generating properties and rental income streams provide relatively stable and predictable cash flow. While primarily income-focused, REITs also have the potential for capital appreciation, adding another layer of returns.
You can invest in publicly-traded REITs like you would a traditional equity. You can also invest in non-traded REITs through a real estate crowdfunding platform like Fundrise or Groundfloor.
REITs can be a valuable addition to an income-generating investment strategy. They offer high dividend yields, potential for diversification, and liquidity. However, like any investment, they come with risks that need to be carefully considered.
PROS:
- Diversification: REITs provide exposure to real estate, which can diversify an investment portfolio and reduce overall risk.
- Liquidity: Unlike direct real estate investments, REITs are traded on major stock exchanges, making them easy to buy and sell.
- Professional Management: Investors benefit from the expertise of professional management teams who handle the property management and acquisition strategies.
CONS
- Lack of control. As an investor in a REIT, you have limited control over the specific properties in the portfolio and how they are managed.
- Interest rate sensitivity. REITs may be more sensitive to changes in interest rates, as higher interest rates can make it more expensive for REITs to borrow money and may reduce the value of existing fixed-income investments held by the REIT.
- Dividend risk. REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, but there is no guarantee that dividends will be paid or that they will be sustained at current levels.
You might also be interested in: Ultimate Beginner’s Guide to REIT Investing.
4. Music Royalties
Music royalties are a type of alternative investment where payments are made to music creators and rights holders for their music. They are a form of compensation for using intellectual property, in this case, the music itself.
Music royalties can provide a reliable and steady income stream for investors, with returns ranging from a few percentage points to double-digit returns.
The returns from investing in music royalties can vary widely and depend on several factors, including:
- Popularity of the music
- Type of royalty
- Length of the royalty agreement
For example, mechanical royalties from physical and digital music sales may offer a fixed rate of return of around 9.1 cents per song per copy sold. In contrast, performance royalties may offer a variable rate based on the number of plays or performances.
In some cases, investors may be able to negotiate a higher rate of return by acquiring a music catalog or song that is particularly popular or has a proven track record of generating royalties.
Read more: The Ultimate Guide to Investing in Music Royalties.
PROS
- Steady Income Stream: Music royalties can provide a steady income stream as long as the music continues to be used and generate revenue. This makes them an attractive investment for investors seeking consistent returns.
- Low Correlation with Other Asset Classes: Music royalties have a low correlation with traditional asset classes such as stocks and bonds, making them a valuable diversification tool for an investor’s portfolio.
- Predictable Income: Royalties from well-known songs with a proven track record of revenue generation can provide predictable income and a measure of security for investors.
CONS
- Lack of Transparency: The music industry can lack transparency, making it difficult for investors to determine the value of music royalties.
- Difficulty in Valuing Music Royalties: Music royalties have no standardized valuation methods unlike other assets, such as stocks or real estate. This can make determining their value for capital gains or tax purposes difficult.
5. Real Estate Crowdfunding
Real estate crowdfunding is when investors pool their money together through a crowdfunding platform to fund some or all of a real estate project.
The types of crowdfunded real estate projects can vary from individual properties to large multi-family apartment complexes and retail spaces.
Crowdfunded deals generally have a long investment horizon of at least 3 years. However, some platforms specialize in deals that can be as short as 6 months.
Crowdfunded real estate investments are private investments. They do not trade on an exchange like the NYSE. Instead, the investments are structured as a private REIT, an LLC, or a debt note, like a Limited Recourse Obligation.
Read more: Ultimate Guide to Real Estate Crowdfunding
PROS
- No Property Management: When you invest in real estate crowdfunding, you get the benefits of investing in real estate without the stress of property maintenance, tenant management, and insurance, to name a few.
- Non-Correlated Returns to the Stock Market: Private real estate has a correlation of 0.14 and -0.12 with publicly traded stocks and bonds, as noted in a TIAA study on private real estate investing.
CONS
- No Independent or Public Source of Performance Data: Because real estate crowdfunding offerings are private investments, they do not provide the same level of information as you commonly see for publicly traded REITs.
- High Fees: Private real estate investments tend to have higher fees compared publicly traded REITs. Most crowdfunding platforms have a 1% asset management fee, while the average publicly-traded REIT ETF has an expense ratio of 0.41%. In comparison, REIT mutual funds have an average expense ratio of 0.85%, according to the Motley Fool.
How To Buy Income Generating Assets
There are several avenues available to you if you are interested in buying income-generating assets.
- Dividend Stocks and Bonds: You can use traditional brokerages like Charles Schwab and Fidelity
- REITS: Publicly traded REITs can also be purchased through traditional brokerages
- Music Royalties: Royalty Exchange
- Real Estate Crowdfunding: Groundfloor or Fundrise
