How To Invest $100,000 Today For Passive Income (2024)

Co-produced by Austin Rogers.

Congratulations! You're one of those few lucky individuals who have $100,000 in cash that is available to invest.

Maybe you discovered it in a long-forgotten bank account. Or you inherited it from a family member who recently passed away. Or you sold your second home and have leftover proceeds after taxes. Or maybe you just won the lottery.

In any case, you have ample cash to use as dry powder for investments, and you want to use it to build a passive income stream. The rest of us can daydream about having that amount of available cash, but you've actually got it and need to figure out how to invest it.

Before giving our answer, we recommend asking yourself three questions:

1. Are your emergency savings adequate? Depending on the level and reliability of your other income, as well as your personal risk tolerance, the common advice is to stash 3-12 months in a savings account to use for emergencies or everyday spending if other income streams dry up.
2. Do you need the money back for something else in less than 3 years? Stocks can go, and many times have gone, multi-year periods without providing positive returns. Investing in public companies is by nature a long-term endeavor.
3. What is your long-term investing goal?

That last question, often posed by financial advisors, may be annoying to some people. The answer may seem obvious: "To be richer than I am today!"

But truthfully, there are numerous specific goals for which one might engage in long-term investing:

• Help pay for your child or grandchild's college tuition.
• To retire 5 or 10 years early.
• To be able to afford more or better vacations.
• To give more to charity.
• Because it's fun to compound money.

All of those (and many others that aren't listed) are legitimate, specific reasons for engaging in long-term investment. And ideally suited to achieving all of these goals, we would argue, is investing for passive income.

Generating passive income from one's investments allows one to fund their eventual desired spending without touching the principal or selling the assets themselves.

It is akin to harvesting the fruit of an orchard instead of incrementally chopping down trees for firewood.

So, let's look at two different ways you could invest $100,000 for passive income today -- one passive and the other active.

Investing $100K Passively

Let's say you like the idea of generating passive income from your investment portfolio, but you don't want to read financial statements all the time. You have better things to do. You are fine leaving the stock-picking to professionals (or professionally designed formulas), even if it means potentially accepting slightly lower passive income generation.

One could mix and match various low-cost exchange-traded funds ("ETFs") to calibrate their perfect blend of passive income funds. Here is a set of five we'd suggest considering:

SCHD is a strong all-around pick for both total returns and dividend growth. It owns a broad swathe of high-quality, dividend-paying US companies across most sectors of the economy and can be thought of as a one-click investment in the American economy.

But SCHD explicitly excludes real estate stocks. That's where VNQ comes in. VNQ is a broad-based real estate ETF that owns real estate investment trusts ("REITs"), real estate services firms, and homebuilders. It offers a nice blend of higher yield and moderate dividend growth.

MLPX invests in midstream energy companies that own oil & gas pipelines, storage facilities, processing plants, and export terminals. It is a safer and less volatile way to gain exposure to North American energy independence than upstream (exploration and production) players, and it pays a fairly high, steadily growing dividend.

PFXF owns preferred securities, which feature the perpetual nature of equity but the fixed-income characteristics of bonds. Specifically, PFXF invests in preferreds outside of the financial sector in order to avoid potential future weakness in banks. Its high yield is safe, but the payout is highly unlikely to grow.

Finally, BIZD owns a basket of business development companies ("BDCs") that extend short-term, floating-rate loans to private, middle-market businesses. They issue a combination of equity and debt in order to invest in higher-yielding loans as well as warrants for upside. The ultra-high yield is the primary source of returns, and investors shouldn't expect much dividend growth.

Since late 2013, these five ETFs have together returned 20% on a price basis alone but nearly 100% (98%, to be exact) on a total return basis. That extra 78% in total returns came from passive income.

If you invested $100,000 equally across all five of these ETFs ($20k into each), you would generate about $6,300 per year in passive income.

Investing $100K Through Active Stock-Picking

We do not wish to knock the passive approach to income investing. It does come with its benefits. For example, it provides ample diversification across many stocks and sectors. And since there is a monetary value to one's time, it is an efficient way to generate truly passive income so that one can spend time doing other things.

But in our view, the ideal way to invest for passive income is through an active approach in which one invests in individual stocks with the mindset of a business owner. Stocks, after all, simply are ownership stakes in real businesses.

For those willing to roll up their sleeves and invest some time in research or invest some money into services that perform and distill research on your behalf, owning a basket of hand-picked stocks comes with the potential for higher yields, faster dividend growth, and safer income streams than a passive approach.

While it would take a lot longer than the space of one article to give an example of how one could invest $100,000 into a diversified group of dividend stocks, we will give three examples to show how stock-pickers can maximize income and dividend growth:

1. Clearway Energy Inc. (CWEN, CWEN.A): CWEN owns and operates power production assets primarily from renewable sources like wind, solar, and battery storage, as well as a few natural gas-fired plants in California. Renewable energy producers are all suffering right now from higher interest rates as well as an unusually bad year for wind power, but we see these as temporary headwinds. CWEN enjoys some major benefits such as sponsorship by a renewable energy developer co-owned by Global Infrastructure Partners and TotalEnergies (TTE), and its balance sheet is among the strongest in the sector with no unsecured debt maturing until 2028. The stock yields 6.5%, and management expects to raise the dividend by 6-8% annually through at least 2026.
2. Conagra Brands (CAG): CAG is a consumer-packaged goods producer that owns a broad stable of household brand names like Healthy Choice, Slim Jim, Hunt's, Gardein, Reddi Whip, and many others. In particular, CAG has become a major player in the frozen meals segment, commanding over 40% market share. The company is suffering the headwind of a weakening consumer but also enjoying the tailwind of supply chain easing. Leverage of 3.6x EBITDA is higher than management's target 3x ratio, but the additional free cash flow generation from falling input prices and less investment into product innovation should allow CAG to pay down debt going forward. The dividend yield is 4.5%, and the dividend should grow in the low- to mid-single-digits.
3. Verizon (VZ): Telecom competitors AT&T (T) and T-Mobile (TMUS) may have largely caught up to VZ's network quality at this point, but VZ still remains the safest and highest-yielding of the telecom giants. Its debt level remains elevated at 3.3x EBITDA after heavy spending on the rollout of its 5G infrastructure in recent years, but management now plans to significantly reduce capex going forward, which frees up cash for deleveraging. The increased free cash flow going forward also creates more buffer for VZ's ~8%-yielding dividend. On top of that 8% yield, the telecom stalwart is expected to keep upping its dividend by about 2% per year going forward.

These three stocks offer an average yield of 6.3% (the same as our hypothetical ETF portfolio above) but also faster and more predictable dividend growth averaging around 4.5% per year.

There are many opportunities in the market like these three high-yielding stocks right now. While we wouldn't invest all of our investable cash into just these three, we think they make a decent place to start hunting for passive income.

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