P2P Archives - Lazy Man and Money

If you are looking to make income by investing your money you are not alone. For the 73rd straight year, our savings account is earning an interest rate of zero. Yours are probably doing the same. The Federal Reserve has dropped the Federal Funds Rate to 0.25%, which in layman terms means that you aren’t getting paid much interest in your savings accounts. Fortunately, this also means that some of your loans may be charging less interest.

Over the last couple of weeks, I’ve been talking a good friend of mine who is a little older than me… kind of like a big sister. We think alike on many things. In some ways it is almost like talking to myself, but a “me” with ten years of more life experience.

Lately, we’ve been focusing on investments to create income. We’re both in a fortunate situation where income is steady despite COVID-19. Since we aren’t traveling, going to restaurants, or buying much gas for our cars our spending is way down. That leaves us with a little more money to invest than we’d normally have.

At the same time, the stock market continues to be near new highs. I’m worried that stocks are priced too high, especially when corporate profits are likely to be so low. Many, many people seem to be worried about that. For this reason, I’m looking for investments that tend to be safer. I’ll return to my usual growth investing when the pricing is better. In the meantime, I’ll continue to stay invested, but stay conservative.

Many people moving into their 30s and 40s find that they have more responsibilities (i.e. children). It makes sense to have investments that generate income. That income can be used to supplement your salary now or to help phase out your job in the future.

If you could generate $50,000 in cash from investments, you could probably retire, right? Of course, your answer depends on your spending, assumes no inflation, and has a bunch of other messy details.

So in this world of (close-to) zero interest rates, how do you generate income?

Income Investing: How to Generate Cash Now?

This is a refresh of an article from 2015. While I have been talking with my big sister about this topic again, I also participated in this this Twitter conversation with Financial Pilgrimage. Specifically, he asked, “Where can you invest your money passively these days for a 3% return or greater besides stocks?”

I don’t want to discount stocks because they are a viable option… perhaps the most viable option. Let’s start there and branch out.

Dividend Stocks for Income

For most of my investing life, I never looked at dividends. I forgot that people once bought stocks to create income. Companies would pay out profits to shareholders and shareholders could use that money, to… well… buy stuff they need. It was a good little system. I speak of it in the past tense because many companies stopped paying dividends and instead kept the money to grow profits and raise their stock prices. In reality, dividend investing didn’t go away, I was just too wrapped up in tech stocks (which rarely pay dividends) and index investing (set it and forget it) philosophies.

In 2020, I’ve focused more on dividends. I like the idea of companies paying me money even if the stock market is crashing. I’ve mentioned that I’m managing stock market risk and removing tech risk from my portfolio with dividends. Specifically, I’m buying iShare’s high dividend ETF (Symbol: HDV). It has many big companies that you’ve heard of. It also pays a dividend of more than 4%.

Another thing that I like about dividends is that they are very tax efficient. Qualified dividends can be taxed at 0% at reasonably high-income brackets (~$75,000 for joint filers). If you make less than $400,000 qualified dividends are taxed at 15% a year. (This is overly simplistic for the scope of this article. Please see your tax professional for more information and advice.)

Unfortunately, due to COVID-19, corporate profits have dropped. Some companies can no longer afford to pay the same dividends they did in the past. That’s why I like the ETF approach. It spreads that risk over a lot of companies.

If you want to take a more hands-on approach for potentially bigger gains, you could look at making passive income with dividend kings. If you prefer to get higher dividend gains without hours of research, I recommend Sure Dividend’s newsletter. That link to the newsletter has a special discount rate and in full disclosure, I make a few dollars if you sign up for it.

Find a Strategic Investment Balance

The credit for this idea goes to my aforementioned big sister. She had mentioned that she was looking at the Vanguard LifeStrategy Income Fund (Symbol: VASIX). It’s a conservative blend of 20% stocks and 80% bonds. Historically, it doesn’t go up or down a lot. Since it was created in 1994 it has had annual returns of 6.26%. It’s 1-yr, 3-yr, 5-yr, and 10-yr returns are all between 4.95% and 6.82%, which gives you an idea of how consistent it is. During the big stock market crash of 2008, it lost about 15% of its value. That’s very good when traditional stock investments lost 50% of their value.

This could be an option to park some medium-term money that you may use in 2-4 years. I’m interested in this because it achieves my goal of staying invested, while still providing some protection in the case of a big market crash.

Income from Real Estate Investment Trusts (REITS)

This is really a special case of the dividend stocks above. However, the profits are generated by real estate – which can move in a very different direction than the rest of the stock market. REITS are traded as stocks and have to pay 90% of its taxable income as dividends to shareholders. The end result is that you can earn 4-7% in dividends. However, like a stock, their value can go up and down.

My favorite way to buy REITS is with Vanguard Real Estate ETF (Symbol: VNQ). It’s easy one-stop shopping with a company, Vanguard, that I trust.

Getting Income from P2P Loans

In the past, I’ve recommended P2P loans. They haven’t worked out as well as I have expected. A few days ago the top P2P loan company, Lending Club, announced that it closing down its lending platform.

I had been steadily pulling my money out of Prosper and Lending Club for the past few years. Prosper is still around and it may be a good fit for getting a passive 3%+ return on your money.

Skip Income Investing: Pay Down Your Mortgage Instead

One of the readers of the Twitter thread mentioned an obvious way of getting 3% for many people… paying off a mortgage. That’s a guaranteed return on your money, which may be valuable to you.

I’ve been against this for years because I’ve always felt that I can make 8-10% by investing in the stock market. Over the long run that has worked out exactly as planned. However, his stock market feels different and I’m not sure what has happened in the past is going to continue for the next 10 years.

I’ve mentioned over the last few weeks that we are doing a 1031 exchange – selling one real estate property and buying another one. Because we formed a corporation, the bank is charging us a 4% interest rate. Not only that, but it readjusts every 5 years – it could be 7% or more in 2020. I didn’t know this when we went down the 1031 exchange path. Now, I’m much more interested in paying down this mortgage quickly.

The downside of paying down your mortgage is that you are effectively locking yourself into that 3% (or whatever your interest rate is) return for the long term. Also, in this case, you aren’t creating investment income. Instead, you are reducing debt, which, while different, can be effectively the same.

Get a High Interest Savings Account

Derek of Life and My Finances mentioned that Lake Michigan Credit Union has a 3% Max Checking account.

I didn’t like the requirements of direct deposit, 10 debit card purchases a month and 4 logins to their website. The direct deposit it a one-time change with your work, which hopefully isn’t too difficult. Derek mentioned that using services like Mint and Personal Capital count towards the logins. That leaves 10 debit card purchases a month. If you are still buying coffee shop or Starbucks each day, this may be easy.

For me, making the 10 debit card deposits would be difficult. I also know that I would forget or not be able to keep track of for several months of the year.

Final Thoughts on Income Investing

I think the best plan is to combine multiple of the above suggestions. A portfolio of 35% HDV, 35% VASIX, 10% VNQ should provide some long-term hopefully, safe gains. The remaining 20% of your money could be used to pay down a mortgage and invest in a high-interest savings account.

This wouldn’t survive a big market crash and still make 3%, however, it would probably not lose too much and put you in a position to make 5-6% most years.

This article was originally published on Mar 2, 2015 at 10:45

In today’s tough economic times, people are seeking to make investments that ensure the most return on their money. This calls for smart and sensible decisions pertaining to where and how to make the investment. Occasionally, it might also require that you look past the traditional investment options i.e. stocks, bonds, and mutual funds.

Non-traditional investment options are increasingly gaining traction among individual investors.

In addition to the group of investors seeking to diversify their traditional investment portfolios, a new crop of investors is increasingly putting money in investments well out of the mainstream as their primary investments.

Non-traditional investments are particularly attractive as they provide the investor with:

Greater investment portfolio diversification beyond the traditional options
Greater risk management options
Access to investments and markets ordinarily inaccessible to regular individual investors

Devoid of the “head spinning” complexity of regular investments today, non-traditional investments are proving a worthwhile venture.

Some of the popular non-traditional investment options include:

1. Collectibles – Collecting things, albeit not a new activity, is fast gaining popularity as an investment option. People are increasingly buying collectibles with an eye on their potential returns.

While this form of investment could give substantial returns, working knowledge of the niche is required. Collectible prices have been known to fluctuate over short periods of time so it is important that one invests in them with “money they could afford to lose.”

2. Jewelry – People are increasingly looking at jewelry as a form of investment rather than focusing on its ornamental value. Businesses like www.frontjewelers.net are helping individuals generate more investment options by offering them franchise opportunities.

It is safe to say that jewelry as a money minting investment can only get better with time.

3. Real estate – Property is arguably the ultimate tangible asset. In contrast to other tangible assets, the price of property performs more consistently and there are numerous ways to invest in the industry. Some of the real estate investment options include:

Investment in rental property – In this option, you acquire a real estate investment at a value substantially lower than the market value. The property is then rented out to tenants. To make the investment pay off, the you look at the price of the property appreciating and mortgage amortization.
Owning your own home – This is a much simpler way to invest in real estate. You live in the investments. For payoff, you look at a combination of mortgage amortization and price appreciation.
Real estate investment trusts – REITs let you invest in massive income-generating properties. Unlike the other real estate options, REITs do not buy real estate properties with a view of reselling them but to increase their real estate portfolio.
REITs could be alternatively referred to as trust funds with high yields that invest in very big properties and sell on big markets.

4. Peer to peer lending – In the recent past, there has been a considerable growth in the number of lending clubs on the internet. These lending clubs help bypass all the bureaucracy involved in banks as loan intermediaries. The lenders also make good returns on their investments.

[Editor’s Note: I think I’d stick with the later two. After the Beanie Baby crazy of 1996 and its collapse, I’m not big on collectibles. I don’t know the first thing about valuing jewelry. I can look up the price of gold, but I judge the qualify of craftsmanship or style to make it worthwhile.]