Whether you’re bringing in income from rental properties or stock dividends, there are many ways to make passive income. There is a catch, though. In most cases, to make a significant level of passive income, you need to have enough money to invest initially.
If you have accumulated enough wealth, there is one under-appreciated way to grow your annual wealth without much effort — closed-end funds (CEFs). More specifically, if you currently have $1 million or more, an investment in CEFs could produce as much as $75,000 or more in passive income.
So, while you need money to make money, this can be an excellent opportunity to earn income the easy way.
Which Funds Can Pay $75,000 Per Year?
A million dollars is no small chunk of change — but it’s still an obtainable goal for many Americans. Data shows that more people now have at least $1 million in their retirement plans. Although Americans build wealth in many ways, if your goal is to reach $1 million by retirement, it’s recommended that you consistently save from a young age and invest your savings into the stock market.
If your goal is to build passive income, there are several ways to do so.
Real estate is one option, but this route often requires more-active involvement and can be costly in today’s market. Bonds and dividends are two other popular ways to make income, but even with $1 million, the yield can be somewhat disappointing.
Another option is closed-end funds (CEFs), a special type of mutual fund that can be traded on stock exchanges.
When investing in CEFs such as the New America High Income Fund (NASDAQ: HYB) or the AllianceBernstein Global High Income Fund (NASDAQ: AWF), which currently yield around 7.5%, an annual investment of $1 million would give you $75,000+ per year.
These closed end funds are currently trading at discounts to net asset value.
Like Monthly Income? You’ll Love Closed End Funds
Following a turbulent year so far, diversification is more important than ever. CEFs can play an important role in building a diversified portfolio to grow your income through investment performance and distributions — but where do you begin?
When deciding whether CEFs are right for you, you must understand how they work based on your objectives and risk tolerance.
A CEF is not a traditional mutual find or ETF. Because they are open-end funds, they take in money from new investors to issue more shares. In contrast, a closed-end fund offers a specific number of shares after raising money through its initial public offering (IPO).
One major perk is the potential for attractive distributions, which most CEFs pay on a monthly or quarterly basis. In most cases, these distribution rates exceed those of comparable investment options, such as mutual funds. As an investor, you generally have the option to take your distributions in cash or to have your distributions reinvested to purchase additional CEF shares.
Another benefit that many investors enjoy is portfolio management. However, this doesn’t come free.
What You Need to Consider Before Investing in CEFs
The CEFs listed above are just four examples, so don’t think you’re limited to these options. There are other CEFs available that offer similar yields. However, before buying any CEF, know that there is a fee associated with the investment managers of these funds. For example, the CEFs mentioned above come with fees of between 1% and 1.5%.
These fees are another reason to buy funds at a discount to their NAVs; this helps to “cushion” fee-related expenses.
Another consideration is that while there is potential to enhance returns through leverage, this can also be a double-edged sword. Leverage is an investment strategy that involves borrowing money to fund purchase assets, increasing returns – but only when investments are rising. When stocks fall, losses are magnified. So, there is the potential for volatility in these funds.
Despite that concern, it is reasonable to assess that CEFs can produce $75,000 or more annually with an initial investment of $1 million. So, if you’re looking for a hands-off way to make passive income, this may be an ideal investment strategy for you.