Why do you work? Why do you spend more than 40 hours a week working?
To make a living. To improve your quality of life in the near future.
For those who have retired, congratulations!
Money is needed for almost everything in life. We need money to purchase food, pay our bills (for utilities, mobile data, and more), set up a family, and a lot more. And work can be mentally and emotionally draining, especially in this challenging economic times due to downsizing and increased competition.
However, all hope is not lost as there are opportunities in the stock market to help you earn a passive income to help you through. This passive income stream will also help you build your wealth, so that you can enjoy a higher quality of life and offer a helping hand to those around you.
What Is Passive Income?
Passive income is income which doesn’t require much maintenance work. Yes, there’s work to be done at the start before you can enjoy a stream of passive income.
What are examples of passive income? You can earn passive income through the licensing of intellectual property such as books and software, rental of property, dividends from stocks you own, by being a sleeping partner of a business.
Here, let’s look at how you can generate passive income through the dividends of stocks you own to build a better life and your wealth. Let’s also explore the stocks which are most suited for this investment strategy.
Which Stock Market Can I Grow My Wealth With Passive Income?
Every big or advanced economy has a stock market – Australia, China, Germany, Japan, Hong Kong, Singapore, UK, and US just to name a few. While you can invest in almost any country’s stock market for passive income, it may not bring you the results you’d hope for. So, which country’s stock market should you invest in?
The US stock market. Here are 5 compelling reasons why you need to be invested in the US stock market:
#1 Largest stock market in the world
This means a wide variety of listed companies to choose from – Apple (AAPL), Caterpillar (CAT), Facebook (FB), General Mills (GIS), McDonald’s (MCD), Walmart (WMT), Uber (UBER) and many more!
#2 Enormous consumer base
The US has one of the largest population in the world. The US has strong purchasing power too. Both of these point towards innovation and profitability which results in optimism in the US stock market.
#3 Accessible to market data and analysis
Market data and analysis are freely accessible. This accessibility helps to level the playing field.
#4 Allows you focus on your work in the day, and investments at night (if you’re living in Asia)
If you’re living in China, Hong Kong, Malaysia or Singapore, the US stock market opens at 930 at night during summer and autumn, and 1030 at night during spring and winter.
This leaves you with quality time with your family before the US stock market opens. You can also use the time to do research on the stocks in your watchlist, allowing you to be focused at your day job.
#5 Flexible lot size
There used to be a minimum number of shares you need to buy in the stock market. Not any more with some brokers.
Brokers such as Robinhood allow fractional share investing. You can be part of Sir Richard Branson’s space venture by buying as little as 1/2 a share of Virgin Galactic! That’ll only cost you $25!
An elaboration and more can be found in 5 Reasons Why You Should Not Miss Out On Trading US Stocks.
6 Tips To Generate A Consistent Stream Of Passive Income
Let’s get to the practical and actionable part. How can you generate a consistent stream of passive income to increase your wealth?
SECURE. What does this acronym stand for?
S: Save more
E: Earn more
C: Consumer staples
R: Real Estate Investment Trusts
#1 Save more
The 1st step is always to save more. With savings for emergencies and family stashed away, you’re ready to invest.
There are numerous ways to save.
One of the ways is to reduce your consumption. This could be ending your gym membership or switching your Internet provider.
Another way to save more is to delay gratification. Can you wait for a month later before you buy that T-shirt or watch? Can you wait for a sale before buying that item that you’ve been eyeing for? Sometimes, the desire simply disappears after waiting!
Another way to help you save more is to buy in bulk. Bring a bag and buy as much as you can in a trip. If you can buy all the things you need for a week, you’ll save on transportation costs and time. You may even get a discount for buying in bulk!
Besides, all the saved time can be used to learn about the stock market, conduct your research, or even be spent with your loved ones!
#2 Earn more
There’s a limit to the amount you can save. Hence, it’s advisable to look for ways to increase your income.
I’m assuming that you are young. This is important as you have lots of energy to spare. You can choose to work overtime at your day job, part-time for a small business, or even freelance.
Work part-time or freelance?!? Yes, that’s right!
There are job opportunities. List down all the skills you have – language, photo editing, photography, digital marketing, bookkeeping, social media marketing, inventory management etc.
You can speak to small business owners to find out how you can help them for a fee. You’ll be surprised at how many will be willing to accept your help!
Next, you’ll need to identify specific stocks in the sectors that you should invest in to generate a consistent stream of passive income. This brings me to the next 2 tips.
#3 Consumer Staples
The Consumer Staples sector forms about 5.7% of the US stock market. It is also a defensive sector. Stocks in the Consumer Staples sector are therefore defensive in nature.
A defensive stock is good for investing for passive income because the products and services such a company provides are necessities for daily living. Hygiene and beauty products, tobacco, supermarkets are examples.
Because business is pretty stable for the companies in this sector, you can reasonably expect a steady dividend payout of about 4%. This dividend payout will be your source of passive income from investing in stocks.
The heaviest weighted 5 companies in this sector are: Procter & Gamble (PG), The Coca-Cola Company (KO), PepsiCo (PEP), Walmart (WMT), and Costco Wholesale (COST).
Utilities is also a defensive sector. No matter how bad the economy is, you’ll still need clean water and electricity.
You can expect a steady dividend payout of about 3%.
The heaviest weighted 5 companies in the Utilities sector are: NextEra Energy (NEE), Duke Energy (DUK), The Southern Company (SO), Dominion Energy (D), and Exelon Corp (EXC).
#5 Real Estate Investment Trusts (REITs)
REITs is another defensive sector. Before the COVID-19 pandemic, office and commercial REITs were safe bets for huge passive income. Only time will tell if the dividend yield from office and commercial REITs will be back to the good old times.
The heaviest weighted 5 REITs are: American Tower Corp (AMT), Prologis (PLD), Crown Castle International (CCI), Equinix (EQIX), and Public Storage (PSA).
This is not contradictory. After your passive income machine has been generating cash for you, it is recommended that you withdraw some money for your personal enjoyment.
Go get that pair of sneakers which you’ve been eyeing. Explore places which you’ve wanted. Reward yourself!
Celebrate your victories and you’ll remain motivated to feed this passive income generating machine.
When Is A Good Time to Invest In The Stock Market For Passive Income?
Today is never too late. While that may be true, there’s a way to invest in the stock market for passive income at the optimal time.
The best times to invest is just after a crash or after a dip.
Investing after a crash is riskier as you wouldn’t know if the price of the stock would continue to plummet after a minor rally. You don’t want to be caught in a dead cat bounce, losing time and money in the process.
Investing after a dip is safer as it is a sign that the stock is resuming its bullish move. The pre-requisite is there must be a prior bullish trend.
You can use the Trend Pullback (TPB) weekly strategy and indicators to improve your rate of success.
Investing in CCI when the 1st TPB signal came on after the COVID-19 crash is more prudent as the uptrend is more likely to resume. This means that you’ll be making money from dividends and profiting from price appreciation.
Details regarding the TPB strategy can be found here.
Can You Replace Your Salary With Your Passive Income?
Yes, you can. But before you get too excited, let’s do some Math.
Let’s say you’re earning USD24,000 a year. Your passive income has to be USD24,000 or more a year for you to quit your job.
If you’d invested in a stock which has a dividend yield of 4%. How much do you need to invest to get a payout of USD24,000 a year? You’ll need USD600,000.
The calculation has shown that while it is possible to replace your salary with passive income from the stock market, it is unlikely that it’ll happen so soon. You’ll need many years to set aside USD600,000 for investing in the stock market.
You may find it helpful to think of passive income from stocks as additional income to grow your wealth at a supercharged pace.
4 Things You Must Remember
#1 There are many ways to earn passive income
#2 The US stock market is a good place to earn passive income through dividends payouts
#3 Utilize the SECURE framework to build your wealth
#4 Utilize the TPB weekly strategy to increase your rate of success
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Go secure and build your wealth!