How To Make Passive Income with $1000
Hey everyone, let's delve into a topic that's desired by everyone: passive income.
It's essentially the ultimate goal in business, investing, and achieving financial independence.
Imagine the thrill of going to bed one night and waking up the next morning with a bit more money than you had before.
It's incredibly enticing.
When you're starting out, the amount doesn't matter much.
The exhilaration of earning that first dollar passively is so addictive that you'll be driven to keep it going and watch it grow.
Now before we start, this is Ivan here from the Vanilla Investor, a former investment analyst and with over $100k invested in the markets.
My goal is to bring you simple finance at your fingertips.
So, let's dive right in and explore a few simple ways to start earning passive income with just a thousand dollars.
The idea here is to let your money work for you, even if you're not actively working for it.
By the way, these are all practical suggestions that you can actually implement without being too complicated like starting a dropshipping business or writing an ebook on a topic you know nothing about.
Let's face it, while those ideas may work, they're often unrealistic for most people to pursue, and like nobody is actually going to do it.
Instead, I'm focusing on straightforward methods that you can start immediately without starting a dropshipping business.
Now, it's important to manage your expectations from the outset.
Don't expect to get rich quick or be retired immediately with just a thousand dollars in passive income investments.
This isn't about doubling your money every month or making speculative investments for quick profit.
The goal here is to introduce you to small-scale strategies that you can gradually build upon over time.
Plus, I think once you start seeing some passive income rolling in without putting in active effort, you'll likely be motivated to continue and expand your ventures in the long run.
#1: Dividend Stocks
The first method, which is both common and straightforward, involves using your thousand dollars to invest in dividend stocks.
Here's how it works:
When you buy a stock, you're essentially purchasing a tiny ownership stake in that company.
For example, if you go and buy an Apple stock, that’s like you now owning six-millionths of a percent of Apple.
As a shareholder, you're entitled to a portion of the company's earnings, which are typically distributed to investors every four months.
In the case of Apple, their dividend yield is currently 0.57% annually.
This means that for every $100 you invest in Apple stock, you can expect to receive $0.57 in passive income each year.
Now, at first glance, this sounds like very little money – you can't even grab a coffee with that amount.
However, this is completely passive income, earned without any additional effort on your part.
Moreover, the expectation is that the stock's value will appreciate over time.
This is how most investors perceive dividend stocks: they appreciate the consistent, reliable cash flow paid out quarterly.
Additionally, when the stock price increases, investors stand to profit even more.
For instance, if you invest $1,000 in Apple stock, you'll earn $5.70 annually in passive income through dividends.
If the stock price rises by 8% over the next year, you'll also gain an extra $80 in passive income from your initial $1,000 investment.
However, it's crucial to note that if the stock price decreases, you could incur losses on paper.
Nonetheless, most companies continue to pay dividends regardless of their stock's performance, ensuring a steady stream of passive income four times a year.
When it comes to dividend stocks, there's a plethora of options available, each offering varying degrees of return.
- For instance, Johnson & Johnson offers an annual dividend yield of 3.28%,
- Coca-Cola at 3.13%,
- Wells Fargo at 2.35%,
- and AT&T at 6.56%.
So, for every $1,000 you invest, you could earn between $23 and $65 annually in passive income through dividends without lifting a finger.
Now, this isn't "Lamborghini money" – it won't have you living it up at the club every night.
However, earning around 20 cents a day from a $1,000 investment is quite decent considering there’s no extra work on your part.
One Thing To Note About Dividends
An additional thing worth noting is that dividends are typically taxed as ordinary income, meaning they're subject to your regular tax rate.
This can become a disadvantage as your income grows and you face higher tax obligations.
So what I would recommend to mitigate this is to invest in dividend stocks through a Roth IRA or a 401k to minimize your tax liability.
This approach differs from simply holding a stock and selling it after a year, which would be taxed at a lower rate known as long-term capital gains.
So the more you know, the better.
It's essential to be aware of these tax implications, especially as your income increases, to ensure you're not paying more taxes than necessary.
#2: Index Funds
The second method to generate passive income with a thousand dollars is my preferred choice, and it's something I personally do.
That's investing in index funds. Index funds are essentially a basket of stocks or companies that you can invest in, giving you fractional ownership across a wide range of assets.
So instead of individually purchasing each of the top 500 publicly traded stocks on the market, which by the way, would be a time-consuming and expensive endeavor, you can simply invest in a single index fund for $465* that includes all of them.
*P.s. $465 is the price for VFIAX at the time of writing.
That way you would get the diversification by investing in a broad range of assets without the hassle of selecting each one individually.
The advantage of these funds is that they typically perform better than individual stocks chosen by individual investors.
Oh, and they also have a dividend.
Vanguard 500 Index Fund Admiral Shares (VFIAX)
Take the VFIAX as an example; it offers a dividend yield of 1.32% annually.
This dividend is in addition to any potential increase in the stock price.
Alternatively, you could opt for a dividend-paying index fund, which provides a slightly higher yield at 2.95% annually.
Once again, that translates to a reliable $29.5 in passive income every year for every $1,000 you invest, and you don't have to put in any extra work for it.
It's important to note that dividends aren't your only source of profit; the primary profit comes from the stock's value increasing over time.
Looking at historical performance, we've seen an average annual return of 6% to 8% averaged out over the past few 20 to 30 years.
Personally, I favor index funds because they offer extensive diversification, require minimal investment, are consistent and stable, and often outperform even professional hedge fund managers.
Even Warren Buffett, a highly respected investor, recommends them.
So that's where I put most of my money.
#3: Real Estate Investment Trusts (REITs)
The third avenue to generate passive income with a thousand dollars is by investing in a REIT, which stands for Real Estate Investment Trust.
Similar to buying stock in a company, investing in a REIT is like owning a share in a property.
These investment trusts collect funds from investors and use them to acquire properties in specific sectors such as:
- medical buildings,
- restaurants,
- offices,
- or apartment complexes.
They distribute a portion of their earnings to investors in the form of dividends.
By investing in a REIT, you become a fractional owner of a real estate portfolio without the hassle of property management.
You won't need to deal with tenants or property maintenance; instead, you simply invest in the REIT and receive dividends from its earnings.
Examples of REITs
For example, you have Realty Income Corporation.
They've got 15,450 properties under control in 86 separate industries, and they pay out a 5.72% annual dividend.
You also have Four Corners Property Trust, which owns restaurant space, and that pays out 5.86% annually.
Or National Health Investors, which pays out a 5.68% dividend and focuses more on senior living and medical buildings.
And then you also have the Index Fund version of REITs as well, which basically just tracks all of them.
Like you have Vanguard's version, VNQ, which pays out a 4.33% dividend.
Drawbacks Of REITs
However, there are some drawbacks to consider.
First, you won't be able to leverage your money as you would when purchasing real estate in your own name.
Additionally, you won't enjoy the extensive tax benefits that come with owning real estate and being able to write off expenses.
Nevertheless, investing in a REIT doesn't require a high barrier to entry, meaning anyone with enough money to buy the stock can become a partial owner of real estate.
You can start with as little as $100.
With a $1,000 investment in REITs, you could expect to earn between $20 and $60 annually in passive income.
Like I mentioned earlier, keep in mind that some of these dividends will be taxed as ordinary income.
So, to minimize your tax liability, it's better to hold them within a Roth IRA or a 401k account.
#4: Bonds
Now the fourth way to make passive income with $1,000 is to look into bonds.
Not that bond^
This bond^
So, if you're unfamiliar with bonds, here's a simple explanation.
Various entities such as:
- companies,
- states,
- and governments
offer you the opportunity to lend them money.
In return, they promise to repay the loan with interest.
They dictate the terms of the loan, and it's your decision whether or not to invest in them.
Bonds come with a maturity date, indicating the duration of the loan before you receive repayment with interest.
This period can range from a few months to several years or even decades.
The benefit of most bonds is their high level of safety and stability.
You know exactly how much you'll receive by the time the loan matures.
For instance, if you invest in a government or state bond, the likelihood of not being repaid as agreed is pretty much not gonna happen.
And if it does happen, then we have huge problems.
However, investing in company bonds can be riskier, as companies may face bankruptcy.
So that’s why they typically offer higher returns compared to government bonds to compensate for the increased risk.
If it were up to me, I'd opt for investing in a bond index fund.
Take, for example, the Vanguard Total Bond Market Index Fund, which offers a 3.37% annual return.
This provides a safe and stable investment option, shielding you from the volatility of the stock market.
While the return may seem modest compared to other choices I mentioned previously, it ensures a reliable income stream.
Additionally, the value of the bond can appreciate over time.
So, I suggest including some bonds in most investment portfolios, even if it's just 5% or 10%, just something to give you a bit more stability.
In the event of a market downturn, having bonds on hand offers increased liquidity, allowing you to sell bonds and purchase stocks at lower prices if needed.
$1,000 is more than sufficient to begin exploring passive income opportunities and test the waters.
We all have to start somewhere, so think of that $1,000 as the cost of your education.
It's a small-scale learning experience that will provide valuable insights for earning more money in the future.
Keep in mind, once you start seeing passive income flowing into your account effortlessly, it becomes addictive.
The excitement of watching your money grow without any extra work on your part will motivate you to scale up your passive income endeavors.
So, if you want more of these, do subscribe to my YouTube channel and share this with your family and friends!
It really helps, so I do appreciate it!
P.s.s all figures mentioned above are correct as of the writing of this article.
Thanks for reading, cheers!
- Ivan