Dividends and Interest for Passive Income

I'm going to give you four ways to get passive income from investments.  Keep in mind; we could get capital appreciation along with our dividends.  We'll look at safer deals, growth, and higher risk speculation.

First, the Dogs of the Dow.  When the first trading day of the New Year comes along, buy the five or ten of the 30 companies in the Dow Jones with the highest dividends.  Hold the stocks for a year.  Then repeat the process every year.  This strategy has done well over the years.

Second, research closed end funds (CEF's) and mortgage REIT's (mREITs).  Usually CEFs and mREITs pay higher dividends.  A rise of interest rates can be adverse for mREITs.  Mortgage REITs are mortgages.  CEF's frequently invest shareholder's funds in covered calls (options).  To find an mREIT or a CEF, run a stock screener, like the one Yahoo Finance offers, or ask your broker.

Third, foreign government bonds.  OK, we're talking interest here, not dividends.  Foreign government bonds tend to pay much higher interest than U.S. T-Bills.  There are foreign government bond ETFs and mutual funds available in the States.

Fourth, if you have a bank account outside the U.S., you might be earning a hefty interest rate on it.  I might add there are a lot of investments that aren't available in the U.S.

You could use leverage on the Dogs of the Dow selections, CEF's, mREITs, and foreign currencies.  MREITS are already leveraged.  If you anticipate the income from your investments to be greater than the interest you pay to borrow cash (margin), you could use leverage.  You can apply for a margin account at your brokerage.

The world of stock options is very vast.  You can earn income from selling covered calls.  But if the underlying stock goes higher than you expect, your option caps (or limits) the gain.  Options are excellent for hedging your bets. 

Keep in mind you could have above average dividends and have the same stock appreciate in price.  Over time, a dividend strategy can really enhance the income you receive from your stocks.

The reader assumes all responsibility for his/her financial decisions. This article covers investments that can result in losses.