Can you really earn $500 monthly passively? Well, sometimes, maybe, but not always.
The truth is, passive income isn't really passive. It requries a lot of preparation and upfront effort to create the income stream that could be passive. But once you've spent the time to create the passive income stream, you are on track to receiving monthly payments without you ever working.
Keen to learn more? Well, let's start from the easiest to the hardest.
#1 - Dividend or income investing
This is the simplest, and hence often most utilised method when it comes to creating passive income. You simply invest in dividend paying companies such as banks (e.g. DBS, UOB) or real estate investment trusts and collect dividends at a scheduled frequency. Alternatively, you can also invest in an index fund that pays dividends.
Dividends are a form of shareholder returns that the company optionally chooses to return a proportion of earnings to the shareholders. Similar to interest payments that one would receive when depositing money in a bank, dividends are paid if you invest in the company's stock and hold them on ex-dividend date.
The amount of dividend received depends on your holdings. The higher the number of shares you hold, the higher the dividend received.
Take for example the case of DBS, our local bank, which has announced a latest quarterly dividend of $0.36 per share for Q4 2021. For each share of DBS held by the investor, the investor will receive $0.36. If you have 100 shares of DBS on ex-dividend date, then you will receive $36. Multiply that by 4 quarters, and you will receive approximately $144 over a year.
At the current share price of $35.83, the cumulative dividend received in 2021 represents an annual dividend yield of 3.3%. However, if you managed to buy DBS when it was $20 in Sep 2020, then this annual dividend rate is much higher at 6%!
To receive $500 monthly in dividends, you'd need a capital sum of $100,000 (at 6% yield) or $181,000 (at 3.3% yield).
The pros of this method is that it requires little work from your end. Just identify a good company with growing or sustainable dividends, and invest sufficient capital to generate an annual dividend of $6000 (i.e. $500 monthly). If it's too difficult to identify good companies, an alternative is to invest in an index fund that pays dividends (e.g. STI ETF) because it has a huge weight towards dividend-paying companies.
The cons of this method is that it often requires a huge amount of capital outlay to generate even more passive income. Let's say you want to retire with a passive income of $4000 a month to cover your expenses and mortgage. This requires you to invest an initial capital of $960,000 (at 5% yield) to produce a yearly income of $48,000. Almost a million dollars!
#2 - Stablecoin lending interest
Stablecoins are a type of cryptocurrency that has its value pegged to a certain asset, like the USD. Because the value is pegged, it is stable relative to that asset.
Take for example stablecoins pegged to the USD, such as USDC, USDT and DAI. These are cryptocurrencies issued on the blockchain that have its value stable to the USD. For some of these stablecoins like USDC, they have their value fully backed by the USD they hold in reserves, i.e. they are fiat-collateralized. That means for every USDC in circulation, an equivalent amount of USD is held in a bank account, which can be redeemed at any time.
Some stablecoins like DAI are cryto-collateralised stablecoins, i.e. their value is backed by some other cryptocurrency. In the case of DAI, it is backed by a basket of cryptocurrencies like ETH, BTC and USDC as collateral.
Stablecoins are widely utilized in crypto, as they represent a way for crypto investors to obtain loans with a stable value, just like how in real life people collateralize their property for a line of credit from the bank.
Stablecoins have other utility, for example, they are often used by traders as collateral for a margin position to leverage trade. The demand for leverage in crypto inherently creates demand for stablecoins, and hence, lending markets exist for stablecoins.
Lending markets for stablecoins often pay relatively high yields to depositors (lenders) who are willing to lend out their stablecoins. For example, platforms like Nexo and Hodlnaut pay out between 8% to 12% annually on stablecoins.
With such a high yield, generating $500 per month in passive income from stablecoin lending can be done with just $75,000 (at 8% yield with Nexo) or $50,000 (at 12% yield with Hodlnaut).
The pros of lending stablecoins is that the yield is generated on a stable asset that has little price volatility. It is easy to get started - simply sign up and deposit stablecoins to earn passive income.
There are several cons, including risks that are associated with stablecoin lending. Stablecoin lending is not risk free, it is subject to asset risk (of the stablecoin), default risk (of the borrower), platform risk (of the platform you deposit), exchange rate risk (USD/SGD) and there is a steep learning curve before you start earning interest.
If choosing this method, I'd strongly recommend splitting your stablecoins across multiple platforms, and choose the highest quality stablecoin (e.g. USDC) to loan. Note that there is a high probability of losing 100% of your money, so do not invest more than you can afford to lose on a single platform.
#3 - Cryptocurrency staking
Staking is a cryptocurrency concept which involves locking up your cryptocurrencies and receiving rewards for it. It is originally designed for securing blockchains but its use case has since evolved to include protocol staking for yield farming.
In any case, staking is also another simple and easy to start way to earn passive income. You simply buy the asset and stake it to earn rewards. Different types of cryptocurrencies produce different levels of staking returns, and depending on the platform you choose, the returns can also vary.
Let's take for example the simplest way to stake crypto, by using a centralised exchange platform like Crypto.com to stake.
Crypto.com has a staking program called Earn where you can earn up to 10% on your cryptocurrencies held in the app.
If you're holding crypto on a non-custodial wallet like MetaMask, you can also stake your cryptocurrencies with a validator to secure the network.
This can be done on proof-of-stake blockchains like Solana, Polygon, Polkadot, Ethereum 2.0 etc. The process varies by blockchain, but it can usually be done on the wallet or app.
The pros of staking as a passive income stream is that it is also relatively straightforward to get started. Staking is as simple as clicking several buttons on your app or wallet, and collecting rewards after that. However, the process of learning how to stake might take a bit of learning.
Staking promises relatively high yields, but there are also lots of risks. For one, staking the asset exposes you to the price risk of the asset. Even if the staking returns is 20% annually, the price of the asset may go down 50% during that time. Staking rewards can also be changed at any time.
The biggest disadvantage of staking is that it is highly speculative and some tokens can be subjected to pumps-and-dumps where a high staking reward creates short-term demand for the token, increasing its price. Thereafter, large token holders cash out, crashing the price, and also the rewards yield (which is usually paid in the token itself). The investor ends up holding the bag, or a bunch of useless coins.
To minimise risks from staking, one could borrow the staked asset, stake it, and earn the staking rewards. Thereafter, pay back the loan interest and keep the rest of the rewards. This may work in some cases, where the staking yield is much higher than the borrowing interest. However, there are also risks associated with this method, including the possibility of being liquidated when the price of the staking asset goes up.
#4 - Affiliate income
Affiliate income is usually how bloggers, influencers and YouTubers earn money. They act as affiliates partners of brands, who work together with them to reach a larger audience to sell their services. In return, whenever the blogger makes a sale through an affiliate link, he/she can collect a small proportion of referral earnings.
Affiliates are a common industry practice, even ShopBack is an affiliate business where they refer customers to brands, give cashback - usually the affiliate revenue - and monetise the traffic in other ways.
Affiliate income can be passive if your audience is big, and a consistent stream of visitors read your blog or view your YouTube videos. As the space grows, it becomes increasingly difficult to stand out. It also requires a lot of dedication to create content and find an audience that supports your content.
We see an increasing number of Singapore financial YouTubers as the financial blog space becomes super competitive. YouTube itself is also becoming super competitive, and new players might find it difficult to stand out from the crowd.
Most successful blogs and channels can earn upwards of $1000 per month in affiliate income, others can earn 5-digits of affiliate income. However, the journey to create that successful platform with a large audience is time-consuming, and requires a mix of entrepreneurship, digital marketing, design and IT skills. It's not easy, but those who do well, can build a significant passive income stream.
#5 - Courses and ebook royalties
The best form of passive income is often the productization of your knowledge, i.e. turning your knowledge and experience into a digital product that can be sold at almost zero marginal cost. This turns your product into a recurring revenue stream that can still be sold even if you're not working.
Setting up this income stream takes the most amount of upfront work, but the rewards can be rewarding. Filming a series of videos for a course takes time to plan, shoot, edit, conceptualize and produce. It then takes effort to market the product to an audience. However, assuming the course is priced at $19, all it takes is to sell 26 units a month to produce the $500 in passive income.
What if the course is higher quality or highly valued and is priced at $39, which allows you to sell just 12 units a month to create that $500 in passive income. The more demanded and well produced the course, the higher the perceived value of it, the higher it can be charged, allowing you to focus on production rather than sale to hit your monthly income target.
The same concept applies for ebooks, which are digital copies of written content sold on platforms like Gumroad and Amazon.
Well that's it! 5 ways to earn $500 in passive income monthly. You can now see why most people simply invest, because it's the least labor intensive but most capital intensive. Obviously, to truly create passive income that's sustainable, it's best to productize something you have that has defensible moat.
Don't worry about passive income until you've accumulated a strong capital base. 5% yearly on $10,000 won't change your life, but 5% on $500,000 might. It could give you options in career choices, and let you enjoy life a little bit better with a less demanding job and more free time.
What other ideas do you have?
Get the latest updates on Telegram or by subscribing to the email list.