"All I do is push a few buttons, and I earn $75,000 a year…"
Most entrepreneurs go into business seeking million-dollar fortunes. The entrepreneur I met last week, Bob, set up a business to generate $75,000 in income each year.
Bob's business doesn't employ any staff, make any fancy products, or operate any complex machinery. To open shop in the morning, Bob turns on the lights, sets the air conditioning, and presses the buttons. Then, he spends the rest of the day sitting at a desk, watching the stock market, surfing the Internet, and, of course, collecting money.
Most entrepreneurs go into business seeking million-dollar fortunes. The entrepreneur I met last week, Bob, set up a business to generate $75,000 in income each year.
Bob's business doesn't employ any staff, make any fancy products, or operate any complex machinery. To open shop in the morning, Bob turns on the lights, sets the air conditioning, and presses the buttons. Then, he spends the rest of the day sitting at a desk, watching the stock market, surfing the Internet, and, of course, collecting money.
Bob lives in a town popular with young families. The schools are great. The community is safe. Parents have only one problem. It's extremely hot in the summer and cold in the winter, and the kids had nowhere indoors to run around.
Bob noticed this gap in the market. So he leased an abandoned car dealership, outfitted the building with rubber floors and walls, and filled it with inflatable slides, bouncy castles, and arcade games. He charges $5 an hour for little kids and $10 for big kids. He sells snacks and receives royalties from the arcade-game suppliers.
Bob is the only game in town, so he always has customers. It's a simple business with almost no operational risk. He has no staff. He has no major assets. And most importantly, he has no growth potential. Instead of wasting money on ambitious growth ideas – a mistake many inexperienced entrepreneurs make – he sits back and captures a steady cash income.
While the children run and jump for two hours, the parents sip coffee in the air conditioning. Bob keeps one eye on his customers and one eye on his laptop. He makes $75,000 a year before tax, from an investment of less than $200,000.
"Congratulations," I told Bob. "You've built an impressive passive income stream."
You can earn a large passive income, too… just like Bob. The investments you need are all available in the stock market. All you have to do is buy these passive income stocks, sit back, and collect the cash flow…
Bob noticed this gap in the market. So he leased an abandoned car dealership, outfitted the building with rubber floors and walls, and filled it with inflatable slides, bouncy castles, and arcade games. He charges $5 an hour for little kids and $10 for big kids. He sells snacks and receives royalties from the arcade-game suppliers.
Bob is the only game in town, so he always has customers. It's a simple business with almost no operational risk. He has no staff. He has no major assets. And most importantly, he has no growth potential. Instead of wasting money on ambitious growth ideas – a mistake many inexperienced entrepreneurs make – he sits back and captures a steady cash income.
While the children run and jump for two hours, the parents sip coffee in the air conditioning. Bob keeps one eye on his customers and one eye on his laptop. He makes $75,000 a year before tax, from an investment of less than $200,000.
"Congratulations," I told Bob. "You've built an impressive passive income stream."
You can earn a large passive income, too… just like Bob. The investments you need are all available in the stock market. All you have to do is buy these passive income stocks, sit back, and collect the cash flow…
So how do you identify the best passive income stocks?
First, you should only buy companies with simple business models…
Simplicity is important because it's easy to identify the risks in a simple business. All businesses carry risk. If you can identify them, you can make a more accurate assessment of a company's value. Would you rather make a bid on a vast corporation with myriad operations and opaque accounting – say, Citigroup – or a pipeline stock? I always give more value to dividends from simple businesses than dividends from complicated businesses.
Second, look for businesses that don't aspire to grow…
This sounds odd at first. Most investors love growth. You're taught growth leads to profits. But look at Bob's business. He has no intention of growing. He's happy cranking out profits while he surfs the Internet. Or think of a hydroelectric dam or a toll road. These types of businesses make excellent income investments. Expansion is a distraction… and often a big waste of money. Businesses that can't expand have the most focused management teams and pay the safest dividends. You want a company that pumps cash into its dividend, not its capital-expense budget.
Third, pick businesses that enjoy wide moats and significant barriers to competition. Moats used to protect castles from invaders. In business, moats protect dividends. A physical monopoly is the most obvious moat, but moats come in many different guises, like brand names, a niche market, or an expert management team.
Finally, aim to buy stocks that pay little taxes, so they have more money to pay us. REITs and MLPs are the most obvious, but many other companies qualify. Infrastructure companies, for example, often have large tax losses on their balance sheets that they can use to shield future profits.
At current prices, I don't see many opportunities for safe passive income in the traditional high-yield markets. Pipeline stocks are usually one of my favorite passive income stocks. But right now, they're too popular with investors and you won't get a satisfactory entry price. The same goes for REITs, bond funds, and other popular high-yield investments.
Instead, my favorite passive income stocks right now are stocks that meet the requirements above, but instead of paying big dividends right now, they grow their dividends relentlessly, year after year. These stocks will end up generating much higher incomes over the long run than traditional high yield investments.
Good investing,
Tom
First, you should only buy companies with simple business models…
Simplicity is important because it's easy to identify the risks in a simple business. All businesses carry risk. If you can identify them, you can make a more accurate assessment of a company's value. Would you rather make a bid on a vast corporation with myriad operations and opaque accounting – say, Citigroup – or a pipeline stock? I always give more value to dividends from simple businesses than dividends from complicated businesses.
Second, look for businesses that don't aspire to grow…
This sounds odd at first. Most investors love growth. You're taught growth leads to profits. But look at Bob's business. He has no intention of growing. He's happy cranking out profits while he surfs the Internet. Or think of a hydroelectric dam or a toll road. These types of businesses make excellent income investments. Expansion is a distraction… and often a big waste of money. Businesses that can't expand have the most focused management teams and pay the safest dividends. You want a company that pumps cash into its dividend, not its capital-expense budget.
Third, pick businesses that enjoy wide moats and significant barriers to competition. Moats used to protect castles from invaders. In business, moats protect dividends. A physical monopoly is the most obvious moat, but moats come in many different guises, like brand names, a niche market, or an expert management team.
Finally, aim to buy stocks that pay little taxes, so they have more money to pay us. REITs and MLPs are the most obvious, but many other companies qualify. Infrastructure companies, for example, often have large tax losses on their balance sheets that they can use to shield future profits.
At current prices, I don't see many opportunities for safe passive income in the traditional high-yield markets. Pipeline stocks are usually one of my favorite passive income stocks. But right now, they're too popular with investors and you won't get a satisfactory entry price. The same goes for REITs, bond funds, and other popular high-yield investments.
Instead, my favorite passive income stocks right now are stocks that meet the requirements above, but instead of paying big dividends right now, they grow their dividends relentlessly, year after year. These stocks will end up generating much higher incomes over the long run than traditional high yield investments.
Good investing,
Tom
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