By investing in passive income streams, you can put your money to work for you so that
you can work less.
With enough money working for you, you may even be able to quit your job or achieve other
financial goals.
One of the most popular places to do this is in the stock market.
So in this video, we're going to be discussing 4 ways that you can earn passive income through
the stock market.
Many people are under the impression that dividend stocks are the only way to get passive
income in the stock market, but that simply isn’t the case.
While it may be the easiest strategy, there are still 3 other methods to use that can
create huge cash flow.
So stay tuned for the best passive income strategies in the stock market, including
the most lucrative one which we’re saving for the end of the video.
Dividend Stocks
Dividend stocks are without question one of the simplest and easiest ways for new investors
to start earning a passive form of income.
When public companies generate profits, a chunk of those earnings get paid back to investors
in a distribution called a dividend.
Investors can then either choose to simply pocket that cash and call it a day or take
that money and reinvest it in additional shares.
The amount of money you get from these stocks is called the dividend yield, which is expressed
as a percentage.
The dividend yield percentage represents how much cash you’ll get paid per year as a
percentage of the stock price.
So a $100 stock with a 4% dividend yield will pay you $4 per year.
But keep in mind dividend yields vary greatly depending on the company and they fluctuate
significantly from one year to the next.
If you're uncertain about which dividend-paying stocks you should choose, then you should
probably just stick to ones that are considered dividend aristocrats.
A dividend aristocrat is defined as a company that is in the S&P 500 index that has a history
of increasing its dividend value without missing any dividend payments.
Dividend aristocrats specifically have a history of doing this for 25 years or more.
If you're looking for stocks with the highest possible dividend yield, historically speaking
REITs or Real Estate Investment Trusts are some of the biggest cash flow stocks out there.
These are diversified portfolios of real estate properties that distribute their rental income
back to shareholders, so it’s a great way to invest in real estate without all the headache.
If you’re not one for stock picking and you want to be truly passive, however, index
funds are a great start, albeit with a lower dividend yield.
Index funds are investments that hold hundreds or thousands of stocks in a single share.
These often track the S&P 500, which includes 500 of the largest companies in America, or
even the total US stock market, which includes over 4,000 different stocks.
You’ll get a small slice of every dividend within this portfolio, without the risk of
holding all of your money in a small number of individual stocks.
Plus, this index fund strategy is historically proven to beat stock picking over the long-term.
Stock Lending
Stock Lending has historically been reserved primarily for the wealthy and has had a high
barrier of entry, but companies like Robinhood are making it easier for beginner investors
to get in on the lucrative strategy.
With Robinhood, customers can turn on stock lending, giving Robinhood their permission
to lend out stocks in their portfolio.
Whoever borrows these stocks will pay an interest rate on them, a portion of which will get
paid back to you for initially providing those shares.
After a match is made and shares are lent out, customers can track their earnings, see
their current positions and choose to disable stock lending at any given time.
Even when shares are out on loan, customers can sell their shares whenever they please
while realizing gains or losses just as they normally would.
To add a little peace of mind, eligible stocks are backed by cash collateral through a third
party bank.
So, there's no real reason why you should fear your assets not being protected.
Keep in mind that fractional shares aren't eligible to be loaned out, you have to have
full shares to participate.
Stocks with a limited supply have a more significant chance of being loaned out, and may also come
with the highest returns.
Covered Calls
Options, as you may or may not already know, are contracts between two people – a buyer
and a seller.
A Call Option is a time-sensitive contract that gives its holder the right to purchase
100 shares of an underlying stock or fund.
So, if you were to own a call option for a stock like Apple, you could act on that contract
at any time before it expires by purchasing 100 shares of stock at its strike price, which
is fixed at the time the contract is sold.
This is attractive for investors who are bullish on a stock because it enables them to potentially
buy the stock at a discount in the future.
While buying call options secures you the right to buy shares, a covered call is when
you sell the call option, thus giving someone else the right to buy your shares.
So, instead of paying for a contract, you are selling contracts to someone else and
collecting cash in the process.
It's called 'covered' because the contract is covered or secured by your shares.
If a buyer chooses to exercise their call options, you'll be obligated to sell your
100 shares to them.
This is absolutely crucial for you to understand fully because whenever you're selling covered
calls there's always the possibility that you'll have to sell your shares in the process.
Essentially what you're agreeing to is placing the future of your 100 shares into the hands
of the buyer and the market.
And of course, the downside here is that you will have to own 100 shares of something to
participate.
But the upside of covered calls is the fact that it's up to you to decide the exact conditions
of your options contract and the scenario in which your shares can be sold.
That means, if there is some kind of time frame or price point that you're willing to
sell your shares, you can build your covered call contract around that to get the optimal
outcome.
The way you can earn a passive income through selling covered call contracts has entirely
to do with the cash premium, which is the amount of money you'll receive for selling
a contract.
People are paying for this contract, so you'll collect cash in your brokerage account as
soon as your option is sold.
Granted, if the price of your stock goes higher than the strike price before the call option's
expiration date, you'll have to sell your shares.
But, you’ll also keep the cash premium you collected up front.
If the stock doesn’t go beyond the strike price, then you'll be pocketing that premium
and you’ll keep your shares too.
Then you can rinse and repeat to collect more cash!
Generally speaking, investors can expect to earn between 1 and 5% every few weeks just
by selling covered calls.
With a sizable portfolio, this could generate huge income, perhaps enough to even pay your
bills.
Referrals
Online investing and trading brokerage platforms like Robinhood and Acorns are revolutionizing
the way we look at and approach investment trading.
These companies are introducing a large chunk of the population to the stock market who
were previously pretty unversed in it.
As a way to increase their user base, such platforms offer referral bonuses to users
who can get their friends and followers to sign up, link their bank accounts, and start
investing.
That means if you have a significant number of followers on social media, Youtube, TikTok,
or your personal blog, you can potentially earn a semi-passive form of income simply
by sharing referrals.
We say semi-passive only because you'll first need to establish a following and then keep
up with all of your referrals, but if you're lucky enough to already have a large number
of followers, earning extra cash through referrals should be a walk in the park.
After your friends or followers follow your referral link and get approved for an account
on a site like Robinhood, you'll both receive free stock in your choice of one of America's
biggest companies.
You can then either hold on to this stock and let it grow or sell it and pocket the
cash.
Currently, Robinhood permits you to receive up to $1,500 in gift stocks each calendar
year, but whichever trading platform you like to use likely has a similarly generous referral
bonus.
Other Passive Income Strategies
While these aren’t the only ways to generate passive income through the stock market, they
are still some of the simplest ways for beginners to get started.
Or if you’re looking for other passive income strategies, you’re in the right place.
If stocks aren’t your thing, check out these videos for some passive income business ideas
that could help you quit your 9-5.
Thanks for watching and we’ll see you next time.