Two Ways to Generate Passive Retirement Income

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Retirement Planning

Passive income – that’s the dream for most people.

To be able to sleep in. To leisurely read the newspaper over a cup of coffee, maybe play some golf or catch a movie. To pick up the grandkids, go out to dinner with friends, and at the end of the day, when you go to the mailbox, there’s a check waiting for you.

And that check is there waiting for you despite the fact that you haven’t put in a day’s work in years.

There are lots of get-rich-quick/work-from-home scams claiming that just a few hours of effort every week will generate a full-time income.

Sounds nice… But the problem is, I’ve never heard of one that actually works.

If you want income regardless of whether you’re spending 12 hours a day on a construction site or sipping Mai-Tais by the pool, you have to put the time in now to get that stream of money flowing.

Here are two ways you can make sure the checks start arriving in your mailbox…

No. 1: Constant Income From Perpetual Dividend Raisers

Perpetual Dividend Raisers are stocks that raise their dividends every year.

By investing in these kinds of companies, you’re ensuring that you get a pay raise every year, simply for breathing. You aren’t working any harder (in fact, you might not be working at all), but your investments are working harder for you.

Investing in Perpetual Dividend Raisers also helps you stay ahead of inflation and increase your buying power.

For example, let’s say you buy a stock such as Darden (NYSE: DRI), which pays a dividend yield of 3.7%. Over the past five years, it’s raised its dividend by a stunning 28.4% per year. Its most recent raise was 16.2%.

If – over the next five years – Darden boosts its divided by 16.2% per year, in five years, your dividend yield increases to 6.7%.

In 10 years, your dividend yield would be over 14%.

Forgetting for a moment any gain in the price of the shares, just the dividend portion of your Darden investment alone would increase your buying power.

And that’s critical as inflation ticks higher year after year.

If you don’t need the income today, consider reinvesting the dividends. That way, when you do need the income, you’ll have more shares spinning off even more income.

Still using the Darden example, let’s say you buy 200 shares at $57.21.

In five years, your 200 shares turn into 245 shares because you automatically bought more stock with your dividends rather than cashing the dividend check.

And, after five years, let’s say you decide to stop reinvesting the dividend and collect the income. Because those dividends were hard at work for you during the previous five years, you’ll receive $954 per year instead of $771 – a 24% increase.

Because of the immense power of compounding, in 10 years, the difference would be even more extreme.

How extreme? Well, if you decided to stop reinvesting the dividends and start collecting the income after 10 years (instead of five), you’d collect $3,294, rather than $1,635. That’s nearly twice as much!

So, regardless of whether you need the money today or in the future, a Perpetual Dividend Raiser can help generate the kind of passive income you’re looking for.

No. 2: Retiring Through Rental Real Estate

Most rental markets around the United States are hot right now. And we’ve seen that real estate prices have bottomed.

If you can afford it, now is a great time to buy rental properties.

Because as I mentioned, in the current market, rents are high and home prices are still near lows.

You have to be able to handle a bit of risk… There can be months where your property sits vacant with no cash coming in. But for the most part, owning a rental property is a great way to generate monthly cash flow.

One of the nice things about rental real estate is that the rental income usually keeps up with (or even outpaces) inflation. And despite the track record of the past few years, real estate prices generally trend higher (albeit more slowly than we saw during the housing boom) over the long term.

Keep in mind… You need to be comfortable with an asset that isn’t very liquid. And the problems that can come up with this type of asset, such as a broken pipe, lousy tenants, etc.

But if done right, owning some rental properties is a great way of generating monthly income while having someone else pay for an asset that you can choose to sell – quite possibly for a profit – in the future.

And if you don’t want to own the property yourself, look into partnerships. Ask around – you may be surprised to find out how many people invest with a larger group and buy several properties to spread the risk among both properties and investors.

Be sure to check out the managing partner thoroughly. But if the person is trustworthy, owning five properties among 10 investors may be an even more passive way of owning income-producing real estate.

The most important part in all of this is: Don’t put off setting up your passive income stream.

The earlier you get started – particularly with Perpetual Dividend Raisers – the more cash it’ll generate for you in the future. And that means helping your dream retirement become a reality.