Rentiers are individuals who live off passive income, and while this concept may have a negative connotation in some social circles, it is not entirely undeserved. Passive income has been criticized for being an undeserved reward that can encourage unethical behavior, such as bribery. However, passive income from sources like savings accounts or low-risk bonds is generally harmless and can be a stable source of income for individuals.
In the current economic environment, there are more innovative ways to generate passive income that can appeal to investors who have not reached wealthy levels. Three ideas for passive income generation include investing in a special short-term junk bond fund, purchasing stocks that increase dividends annually, and considering annuities for retirees, especially those relying on U.S. Social Security past 2033.
One passive income investment idea involves investing in short-term high-yield bonds, which offer attractive yields compared to investment-grade corporates and money market funds. These high-yield bonds come with certain risks, but the current economic outlook, combined with potential Federal Reserve actions, makes them a promising investment option. Exchange-traded funds such as iBonds and BulletShares offer a diversified approach to investing in this strategy.
Another passive income strategy is investing in stocks that increase their dividends every year. Companies that consistently raise their dividends can provide a stable income stream for investors. While these stocks may not offer the highest yields initially, their long-term growth potential can outperform the bond market. Diversifying among multiple dividend-increasing stocks can help mitigate risks associated with individual company performance.
For retirees, particularly those concerned about potential Social Security benefit reductions in the future, annuities can provide a sense of security. Annuities are often criticized for their complexity and low yields, but they offer reliable income streams and protection against market fluctuations. An option like deferred income annuities can provide guaranteed payments at a later stage in life, offering peace of mind for retirees.
Investors can also consider qualified longevity annuity contracts (QLACs) to reduce required minimum distributions until payouts start. These annuities provide additional income streams while addressing concerns about longevity risk. Single-premium immediate annuities offer a lump sum payment with immediate returns, while deferred fixed annuities provide tax-free yields similar to intermediate-term bonds.
Overall, passive income strategies such as investing in high-yield bonds, dividend-increasing stocks, and annuities can offer investors stability and potential growth in the current economic climate. By diversifying income sources and considering long-term financial goals, individuals can create a sustainable passive income stream to support their financial needs.
