If you’re looking for a reliable stream of passive income, each of these income generating assets has the potential to produce regular cash flow — whether through dividends, interest payments or rent. Many also offer appreciation.
#1. Stocks
A diversified stock portfolio has historically been one of the best income-generating assets you can own. Stocks in the S&P 500 have paid out an average dividend yield of 4.3%, although that number has decreased since the late 1990s.
(Keep in mind, the figures below are in addition to increases in stock price.)
| Year | Dividend Yield |
| 2020 | 1.58% |
| 2015 | 2.11% |
| 2010 | 1.83% |
| 2005 | 1.76% |
| 2000 | 1.22% |
| 1995 | 2.24% |
| 1990 | 3.68% |
| 1985 | 3.81% |
| 1980 | 4.61% |
Stocks known as the Dividend Aristocrats have raised their dividend payout for 25 years or more in a row, and include household names like 3M, Coca-Cola and Johnson & Johnson.
Of course, investing in individual stocks has its risks. Many investors turn to dividend-focused mutual funds for a diversified, professionally-managed approach to dividend investing.
One popular option is the Vanguard Dividend Growth Fund (VDIGX), which invests in large-cap and mid-cap companies. For investors looking for even greater diversification, the SPDR S&P 500 High Dividend ETF (SPYD) offers exposure to the 80 highest-yielding companies in the S&P 500.
Companies that pay dividends tend not to be in a growth stage, so the expected appreciation on dividend paying stocks is lower than investing in broad market index funds. For this reason, it’s debatable whether you should own dividend stocks or use an index-based approach with timely withdrawals.
Recommend reading: See our beginner’s guide to investing to help you decide if a dividend-focused strategy is right for you.
#2. Real Estate
Real estate is often lumped into a single asset class, but it can be broken down into several subclasses, each with unique characteristics.
- Residential rental property: This includes single-family homes, duplexes, and apartment buildings. Rental income from residential property typically comes in the form of monthly payments.
- Commercial property: This includes office buildings, warehouses, retail space and hotels. Rental income from commercial property is usually higher than residential property, but it comes with additional risks (such as the potential for long periods of vacancy).
- REITs: A Real Estate Investment Trust (REIT) is a company that owns, operates or finances income-producing real estate. Income from REITs comes in the form of dividends and potential share price appreciation. Most real estate investors generate income through rental payments, but appreciation can also boost returns significantly.
- Vacation rental property. Income is generated by nightly or weekly rental payments. This type of investment can be more hands-on than other real estate investments, as you may need to manage the property and bookings yourself. To learn more, see our beginner’s guide to profitable Airbnb hosting.
- Land. Income from land typically comes as appreciation when the land is developed.
In addition to this list of subclasses, there are also many ways to invest in real estate.
- Real estate crowdfunding. Platforms like Fundrise and Arrived allow you to invest in professionally-managed real estate projects for as little as $10. These platforms typically offer various investment options, from investing directly in projects to investing in the project’s debt.
- Direct ownership. You can also choose to buy an income-producing property yourself. A primary advantage of this strategy is the significant tax breaks you’re eligible for as an owner.
- Private real estate syndication. Syndication is when a group of investors pools their money to invest in a larger project, such as an apartment complex. The syndication sponsor manages the property and handles all of the day-to-day responsibilities. Private syndications are a popular accredited investor opportunity, as they’re not as liquid as other real estate investing options.
Recommended reading: Start with our guide to real estate investing. From there, check out our individual reviews of various real estate platforms: Fundrise review, Cadre review, CrowdStreet review, DiversifyFund review and Arrived review.
#3. Fixed-Income Securities
Fixed-income securities are debt instruments that pay a fixed interest rate over a set period. The two most common types of fixed-income securities are treasury bonds and CDs.
Corporations and governments issue bonds to raise money for their operations. When you purchase a bond, you’re lending the issuer money with the expectation that they will repay the loan with interest.
Banks and credit unions offer CDs as a way to attract deposits. When you purchase a CD, you’re giving the bank your money for a set period (usually from one to five years) in exchange for a higher interest rate than what you would earn by depositing the money in a savings account.
Other common fixed-income security investments include:
- Treasury inflation-protected securities & Series I Savings Bonds. Designed to help protect against inflation, you can purchase up to $10,000 of Series I Savings Bonds per year ($20,000 for couples). These treasury bonds pay both a fixed-income rate and an adjusted rate based on inflation numbers. Larger investors turn to treasury inflation-protected securities funds (TIPS) as there’s no cap on how much you can invest.
- Municipal bonds — which are loans to cities rather than to the federal government — offer tax-exempt income for investors. Overall, MUNIs tend to pay less interest than corporate bonds but are considered safer.
- Bond mutual funds offer diversification and professional management, which can be helpful for investors who don’t want the hassle of designing and managing their own bond portfolio.
Investors typically generate income from fixed-income securities through periodic interest payment, which are usually dispersed on a quarterly or annual basis. With some bonds, you may also have the option to sell the bond before it matures, which could provide potential appreciation income.
Recommended reading: See NerdWallet’s informative guide on how to invest in bonds.
#4. Farmland
One of the appeals of farmland is that it can act as a hedge against inflation. As the cost of goods increases, so does the value of farmland since it’s the land producing those crops.
Another advantage is diversification, as crop prices correlate weakly with stocks and bonds.
Historically, investors who don’t want to own farmland directly (or don’t have the capital to buy a farm) have turned to farmland REITs and agricultural ETFs for exposure to this asset class. But one newer option is AcreTrader, a platform — similar to crowdfunded real estate platforms like CrowdStreet — that allows you to invest directly into individual farms without needing to purchase the entire property.
If you’re interested in learning more about investing in farmland, check out AcreTrader.
#5. Private Credit
Private credit consists of loans made to companies or individuals by private lenders instead of loans made by banks and other financial institutions. In other words, you’re acting like a bank in that you’re lending out your money.
Common private credit investments include:
- P2P lending on platforms like LendingClub and Prosper, which allow you to loan money directly to individuals and businesses.
- Bridge loans, which are are short-term loans (usually 12 months or less) used to finance the purchase of a property until longer-term financing can be arranged.
- Direct corporate lending, which involves lending money directly to companies, often through a firm. This form of lending took off post-2008 as banks severely tightened lending restrictions.
The benefit of private credit is that it can offer a higher yield than many other investments. In addition, many types of private credit loans are backed by some form of collateral, which helps minimize your risk.
At the same time, private credit can still carry significant risk. After all, these are loans that traditional banks typically turn down due to their risk profile. Therefore, before investing in private credit, ensure you understand the risks and are comfortable with the available illiquidity of an investment.
Recommended reading: Learn more about investing in private credit and see our in-depth review of Percent, a platform that makes various private credit investments available to accredited investors.
#6. Private Equity
Private equity consists of direct ownership in a company that is not publicly traded on a stock exchange. This can include everything from small local businesses to prominent venture-backed startups.
Generating income from privately-held businesses is rare but not impossible. The vast majority of startups — whether a new local restaurant or venture-backed-tech firm — will not pay dividend income to shareholders, as the revenue generated through day-to-day operations is reinvested into the business to help it grow.
The types of private equity investments that generate dividend income tend to be smaller and more mature businesses that you’re investing in because you have a personal relationship with the ownership. It could also be a business you worked for and built up equity in as an employee.
The majority of private equity investments are made with the intention of the business eventually being sold for a profit. The exit could be through an IPO (where the company goes public) or through the company’s acquisition by another entity. Marketplaces for individuals to sell pre-IPO shares in companies, the largest being EquityZen, are also popping up.
Where to learn more: Check out Mainvest, a platform that allows you to invest in small businesses across the United States.
#7. Royalties
A royalty is a payment made to someone for the use of their property, often in the form of intellectual property. For example, if you create a song, book or patent, you can generate royalties by licensing it out to others.
As an investor, you can buy the potential royalties from intellectual property and receive future income-generating payments.
In terms of total market size, royalties are among the smaller asset class on this list. But making money from royalties can be a passive income stream if you find the right asset.
One popular type of royalty investment is music, where you can purchase the royalties to a song and receive payments every time it’s played on the radio, streamed online or used in a movie or TV show.
On the site Royalty Exchange, 10-year rights to the royalties generated by Jay-Z and Alicia Keys’ song “Empire State of Mind” sold for $190,500.
While the projected IRR on that investment was 9.9%, a lot can change over the course of 10 years.
Say an entire music category goes viral, such as EDM in the early 2010s. In a case like this, your royalties could potentially increase beyond the projection.
On the other hand, the value of your investment could also go down due to a decrease in the popularity of an artist or an entire music category.
Examples of other types of royalties include patents (where you’re paid for someone using your invention) and natural resources (where you’re paid for someone using your land to mine minerals or drill for oil).
Recommended reading: How to invest in royalty income.
#8. Cars
While including cars on this list may surprise some people, rental car sharing apps have made it easy for car owners to lease out their vehicles, similar to a rental car agency. Typical rates are similar to those of a car rental agency.
As with hosting an Airbnb, there is some work and cost involved with renting out cars. Customers expect a clean car upon arrival and good communication with the owner. Sometimes you’re required to meet the customer at a pickup location, which may involve arranging a ride back to your home.
However, there is excellent potential here. According to a calculator on Turo’s website (the most popular private car rental app) you can generate well over 100% ROI on your annual payments if you were to finance a vehicle for the purpose of renting it.
Turo then estimates that the average person earns $706 per month from listing their car on the platform.
Recommended reading: How to make money on Turo (and how much you can really earn).
#9. Annuities
An annuity is technically an insurance product where you make a lump-sum payment (or a series of payments) to an insurance company. In turn, the insurer pays you an income stream, often for life, starting immediately or in the future.
Different types of annuities include:
- Immediate annuities, where income payments start immediately after you make your lump-sum payment
- Deferred annuities, where income payments begin at some point in the future.
- Fixed annuities, where the payments are a set dollar amount each period.
- Variable annuities, where the payments vary based on the performance of the underlying investment.
- Indexed annuities, where the payments are based on changes in a stock market index, such as the S&P 500
To add complexity, not only are there many different types of annuities, but the quality of annuities can vary significantly. While annuities can be the right fit for some people, they’re often pushed upon unsuspecting retirees who don’t fully understand what they’re buying or the potential fees involved.
If you’re considering an annuity, my suggestion is to get affordable one-on-one financial advice from a fiduciary who isn’t compensated for selling you the product (such as a fee-only CERTIFIED FINANCIAL PLANNER™)
Recommended reading: See Investopedia’s well-balanced article, “The Pros and Cons of Annuities.”
Income Generating Assets FAQs
An income generating asset is something you own that regularly puts money in your pocket, with you doing little to no work. Cash flow can come in various ways, such as dividend payments from owning part of a business or monthly rents you receive from owning real estate.
Owning income generating assets is a great thing. However, it’s essential to make sure that prioritizing them above other financial goals and investments makes sense when creating a financial plan.
If you have a low income, better uses of your limited resources may be to pay off your credit card debt, build an emergency fund or invest for retirement inside a 401(k).
At the same time, consider creating an income generating asset, such as a small-scale business that can one day be run by someone else or turned into an automated business.
It depends on the risk you’re willing to take. Some private credit investments can pay 20% a year, yet they have the most significant risk. On the other side of that equation, some large companies pay a shareholder dividend of as much as 8%, but these companies’ shares tend to have slower appreciation, which offsets your overall gains. In short, there’s no one highest-paying income generating asset. But as a general rule, the more risk you’re willing to take, the more income you can earn.
Yes, and they’re among the lowest effort options. Remember, when you own a stock, you own an actual share of the business. The employees of that company are therefore working to benefit you. If the company does well, so will your stock value, and you may receive an increase in dividends.
At the same time, research shows that choosing each individual stock in your portfolio yourself is not the best investing strategy, with people who engage in stock picking consistently underperforming the market as a whole. Evaluating the merits of an individual stock is difficult, so we recommend an index fund approach (where you invest in the entire market), exchange-traded funds focused on dividend stocks (if your goal is income investing), or an income-focused mutual fund (if you have a long time horizon).
Your best strategy is to properly prepare yourself before a recession so that changes are not needed once a recession hits. If you’re considering changing your investment approach, you’re likely being too aggressive before the recession and need to rebalance to a portfolio that you’d sustain through good times and bad.
Cash in a savings account is not considered an income producing asset. Income producing assets are typically investments such as stocks, bonds and real estate that can generate a return above inflation or add diversification to one’s investment portfolio. While holding cash does have a place in an overall financial plan, that place is typically to act as a safety net, not to provide income.
What’s the Best Income Generating Asset for You?
Different financial goals and risk profiles demand a different combination of assets.
If you’re a retiree, a mixed approach of stocks and bonds has shown to be suitable enough to sustain a comfortable lifestyle.
If you’re young and looking to diversify your income, you may want to consider building an automated business that spins off cash to invest in real estate and dividend paying stocks.
In other words, the best income generating asset is the one that best fits your financial goals.
