Yahoo Finance 2 Hands-Off Ways to Earn Handsome Passive Income
Written by Puja Tayal at The Motley Fool Canada
Passive income provides you with regular earnings from one or more sources without working for it. You can use this income to support you through different life events – like unemployment, retirement, or a career break – or provide active income when expenses rise. The most traditional form of passive income is renting out your property. But to get to that level, you will have to shell out half a million dollars in initial capital, and the highest rental payout you can get is 2-4% of the value of your property. Plus, you pay tax and 10-20% of your rental income for maintenance.
Two hands-off ways to earn handsome passive income
But there are many other ways to earn passive income other than rent. Here, I will discuss two such ways:
The first is to lend your money and earn interest. This method entails credit risk, but a safer way to do it is by investing in a lender’s stock.
The second is to invest in REITs and earn rental income.
These stocks give you similar exposure, risk, and returns that a lender and a landlord face. But with stocks, you can diversify your investments. Moreover, you can invest through a Tax-Free Savings Account (TFSA) and enhance your returns.
Passive income from lending
The non-bank lender Timbercreek Financial (TSX:TF) provides REITs with short-term bridge mortgages to repair, redevelop, or purchase income-producing property. Here, the lender keeps circulating the amount by lending it to someone else. While the principal amount remains invested, it keeps earning interest and processing fees.
If you were to lend money to someone, you may not have the right resources to map the chances of default. But Timbercreek has a robust model in place to recover its loans.
Timbercreek saw a surge in loan originations when interest rates were low, bringing in significant revenue from processing fees. Moreover, delinquencies were low. Today, interest rates stand at decade-highs, slowing new loans and loan repayments as commercial REITs pause their development efforts till interest rates cool down.
All this pulled Timbercreek Financial’s stock down 25% since the interest rate hike began in April 2022. While the economic outlook remains weak, Timbercreek has the flexibility to sustain the credit risk and continue paying monthly dividends of $0.0575 per share. Now is a good time to grab 100 shares of Timbercreek Financial and get $5.75 in dividends from next month onwards. This amount may look small. But if you keep accumulating more shares, you can get $57.50 per month for 1,000 shares or $575 for 10,000 shares. You can lock in a 9.68% annual dividend yield before it falls.
Passive income from renting
Renting is by far the most popular form of passive income. While commercial and retail REITs slashed their payouts due to low occupancy levels, Slate Grocery REIT (TSX:SGR.UN) stood strong. Its tenants are grocers, a retail segment which is very sticky. They are the ones who attract footfall from a wider audience base.
And since not many new constructions are happening in America, there are limited stores, enabling Slate Grocery REIT to charge higher rent. The REIT passes on this rent to customers in the form of distributions. The stickiness of tenants makes Slate Grocery’s payouts resilient to economic downturn.
Now is a good time to buy the REIT’s units at a 25% discount from its March 2022 peak and lock in a yield of over 9%.
How do investors benefit from the above stocks?
Remember, the monthly payouts discussed above could change depending on the economic and business situations. But similar is the case for lenders and landlords. At least with stocks, you don’t have the risk of keeping your property vacant or your principal amount idle for a few months when it generates no income. In the worst-case scenario, stocks might slash dividends or discontinue operations. In such a scenario, your loss is limited to the amount invested with no added expense. In all, passive income from stocks comes with its benefits.
The post 2 Hands-Off Ways to Earn Handsome Passive Income appeared first on The Motley Fool Canada.
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Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Slate Grocery REIT. The Motley Fool has a disclosure policy.
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