How Passive Is Your Passive Income?

I’ve been lumping in my online income with my passive income, but it isn’t really passive. It may not be very strenuous and it gives me geographic flexibility and I don’t have to show up for work every day, but there is some effort involved. Unfortunately I’m not as clever as Courtney Tuttle, who says he has a site that makes $3,500/month with no ongoing maintance. (If you’d like to buy an existing site that generates income, check out the online businesses for sale on my business & investment store). I’ve just had some limited success with Domain Parking, buts that the extent of my truly passive online income.

Simply put, my online income isn’t really passive. It’s a lot more passive than the website and seo consulting work I do by a huge margin, but its not as passive as dividneds or royalty checks.

So what are the best ways to earn really Passive Income?

1. High Dividend Stocks
There are a lot of stocks that paying quarterly or yearly dividends. Over time, the power of compounding (with a little help from inflation) can substantially increase the value of your dividends. My mother bought the Indian subsidiary of Unilever (Ticker: UL) called Hindustan Lever about 20 years ago. She’s being reinvesting most of her dividends and today her annual dividends are larger than the value of the original stock purchase. American Capital Strategies (ticker: ACAS) has been growing its dividends approximately 10% every year. According to The Dividend Investor,

If we invested $100,000 in ACAS on December 31, 1997 we would have bought 6906 shares. Your first quarterly check would have been $1,726.50 in March 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend payment would have risen to $17,095 by December 2007. For a period of 10 years, the quarterly dividend has increased by 300 %. If you reinvested it though, your quarterly dividend income would have increased by 890%.

Yes, reinvesting the dividends in companies that have historically kept increasing their dividends is key. Even though you might get only 2.5% return today, eventually with the increase in stock price and rise in dividends, your annual return should be greater than 12%. This concept is very well explained in Prof. Jeremy Siegel’s excellent book, The Future for Investors, which I highly recommend.

2. Oil & Gas Royalties

While there is a lot of fraud and speculation in direct oil drilling programs, they can be very, very lucrative for investors. Charlie Munger invested about a $1,000 in such an oil drilling program in the 60s and he’s estimated that its paid out over $500,000 in royalty payments since then. Apparently it still pays out $2,000 a month. Of course, most people NEVER see these sort of returns, but for the average person, investing in Canadian Oil & Gas Royalty Funds (or Income Trusts) is the next best thing. I’ve invested quite a bit of money into both the direct oil wells and the Canadian Income Trusts (or Canroys) and the overall result has been pretty positive in both (which is in excess of 12%).

3. Royalties on Books and Patents

Royalties on Books and Intellectual Property Rights can be even more lucrative. However writing a best-selling book or creating a something thats worth patenting can extremely time consuming and expensive. For most authors and inventors, its a labor of love – something that they would pursue even if there was no monetary reward to it. But many ebook writers who sell get-rich-quick books about “making money online” are getting very wealthy. Most of these books are garbage and the only people getting rich are their authors and resellers. Not a very ethical way to make money.

4. Rental Income on Properties Bought at the Bottom of a Real Estate Cycle.

If you bought rental buy and hold property in California, Nevada, Arizona or Florida during 2005 and 2007, my heart goes out to you. A lot of smart people got suckered into buying at the top of the market and are paying for it. However, if you buy correctly, preferably at the bottom of a real estate cycle, real estate can provide excellent passive income and fantastic tax advantages as well. According to Charlie Munger at the 2008 Wesco Financial Annual Shareholder meeting, “most real estate investors don’t pay any income tax, except once every 20 years or so“. Bought correctly (that is based on value, not speculation), rental properties can provide a steady stream of cashflow that is somewhat inflation-indexed. I say somewhat, because in the short-term anything can happen, but over a long period of time, real estate is going to match the rate of inflation.

5. Investing In Timber

Similar to Canroys, there are companies that grow trees specifically for timber and pay pretty decent dividends. There are also direct tree-planting programs where you can invest a minimum of $5,000 and own a portion of a timber operation. The company does all the work for you and supposedly cuts you a check once a year after a specific time interval. The endowment funds of Harvard and Yale have apparently been investing in timber for several years now with great returns.

6. Domain Parking (or Embarking)

There are many people who buy and hold hundreds of domains (I know a guy who owns 750). They either park them with Sedo or another domain-parking service. These services stick relevant (and sometimes not-so-relevant) ads on your site. The idea is that if someone comes to the site through browser type-in traffic and clicks on an ad, you get paid a portion of this ad revenue. I had hosted several sites with Sedo and made a whopping 2 cents per month. I’ve recently been trying out a new service called Domain Embarking that is working pretty well for me.

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