Greatest things in the world, ranked:
1. Passive income*
*Your experiences may vary. Or not. What do I care?
Wait. I forgot cheeseburgers. Can we start over?
In the world of financial blog land, passive income is pretty much the holy grail. For those of us who are past the student loan/paying off the credit cards stage, we’re almost universally looking for investments that pay us each month, quarter, or year.
We all have different ways to do this. Some are dependent on real estate, leveraging a small down payment into something that generates more than enough cash flow to pay off the mortgage. Some like stocks, especially those that pay consistently rising dividends, hoping to someday just live on the dividends and leave the shares to their wiener grandkids. As we discussed on Friday, that might not be an ideal strategy.
Some are taking a hands off approach to the quest for passive income and choosing to invest in ETFs. These investors either buy something with a small dividend but a decent expected capital gain, or they do like my parents and mostly invest for the interest income. Thanks to the recent sell-off in interest-sensitive REITs and preferred shares, it’s really easy to get a yield in excess of 5% when investing in fixed income.
There are a million other investments that pay some sort of yield, everything from private mortgages (a personal favorite of mine) to the ol’ peer-to-peer lending. The sky is the limit with that stuff.
But as I read some of the analysis that many people put into constructing their dividend portfolios or the time they spend scouring the MLS when looking for a rental property, I start to get skeptical that what they’re searching for is really passive income.
Sorry, not passive
The issue with this quest for passive income is, apparently after only a little stretching, everything gets thrown into the passive income category — even something as active as blogging.
There’s actually an argument to be made that there’s no such thing as actual passive income.
Think about owning a property. Once you get the bad boy rented you’re looking at a year of sitting back and cashing your rent cheques. But before then there’s showing the place, making sure the last tenant cleaned it properly, and scrounging up the cash for refunding a security deposit. And while the guy is there, you’ve got to fix stuff like the air conditioner when sex gets a little too violent (yes, actually happened), and the plumbing when your two young lady tenants decide to flush their tampons (also actually happened).
So, yeah. While owning real estate is far more passive than having a job, I’m not sure it’s totally passive income unless you hire a property manager. But even then, you’re gonna get calls from the manager every now and again.
And then there’s stocks.
One of the reasons why buy and hold forever is so popular is because investors want to be able to make a decision once and never have to think about a stock ever again. All they want to do is sit back and watch the reinvested dividends get bigger and bigger.
But in reality, I’m not sure it’s that simple. I’m relatively hands-off of the stocks I own, but I still spend probably 1-2 hours per quarter per company reviewing the latest quarterly filing, reading articles on the stuff I own, and so on. I tend to research stuff pretty well before getting into it, so there’s not a whole lot of surprises.
But still, that’s not a true passive investment. It’s pretty close, but I’m still doing a little bit of work on everything I own.
I’d argue that the only real passive investments are index funds, but even those are hardly passive if folks are constantly logging into their accounts and poking around, or questioning their asset allocations.
The real beauty of passive income
After saying all that, I hope y’all don’t think I have anything against passive income. That shiz is da bomb, yo, says an uncool financial blogger trying to be hip. You should do everything you can to get in on that gravy train.
Here’s the real reason why you should be striving for all the passive income you can, even if it might not be so cost effective at the beginning.
If you research a company for 3 hours and are only making $20 per year in dividends, that’s probably not such a good trade-off of your time, especially now that index funds with an almost zero management fee are a thing. But if you can eventually scale up and earn $2,000 worth of dividends annually from the same company, it takes almost no extra work.
Passive income is easy to scale. One person can manage a $1 million investment portfolio without any problem, even in their spare time. One person could also manage a couple dozen rental properties while still having time during the day to do other stuff. And so on.
While true passive income rarely exists, that doesn’t mean you shouldn’t strive for it. Almost passive income is just as good.