How to earn passive income, according to early retiree Sam Dogen

Sam Dogen knows a thing or two about passive income.

By the time he left his investment banking day job in 2012, Dogen, the founder of Financial Samurai and the author of “Buy This, Not That,” had built up about $80,000 in annual income outside the office. Combined with a hefty severance he negotiated for, he determined that was enough money to live on.

It was for a while, but when he and his wife decided to stay in San Francisco and have a couple of kids, the family’s cost of living shot up. By reinvesting his passive income along with money he made through his website and book sales, Dogen was able to boost the family’s income over the years as well.

In 2023, Dogen’s passive income portfolio, which includes stock, bond and real estate investments, among others, generated about $380,000.

If you’re looking to build a similar stream of passive income, you’ll have to start somewhere — and likely without the help of an investment banker’s salary or severance package. According to Dogen, the best way to begin earning passive income is through your brokerage account.

“If you want passive income right now, I think the best option is Treasury bonds at 5%,” he says. “It’s amazing.”

How to use your brokerage account to earn passive income

You can buy Treasury bonds through most major online brokerages, as Dogen points out. Treasurys are considered among the safest possible investments because they are issued and backed by the U.S. government, which has never defaulted on its debt.

And given the recent rise in short-term interest rates, short-dated Treasurys — known as T-bills — look particularly attractive. A 1-year Treasury currently pays an interest rate of 4.73%, with shorter-dated bonds yielding even more.

“Right now, Treasurys are the most attractive, with 1-year Treasury bonds yielding about 5%,” Dogen says. “You can buy a bond for $1,000 tomorrow for 5% guaranteed, and you don’t have to pay state income tax [on the interest income].”

You can earn passive income by investing in stocks, too. Dogen has a large portion of his equity holdings in an index fund that tracks the S&P 500. While you may not think of a broad market index fund as an income-producing investment, it is. Stocks in the index currently yield an average of 1.5%.

You can keep a broad equity exposure while earning more income by choosing a dividend-focused mutual fund or exchange-traded fund, says Dogen. He suggests shopping for a fund that tracks so-called “Dividend Aristocrats” — companies that have maintained and raised a dividend payout for at least 25 consecutive years.

“These are larger-cap names, like McDonald’s, that have good cash flow and pay higher dividends,” he says.

Stocks in the S&P 500 Dividend Aristocrats index currently yield about 2.6%, on average.

Investing in real estate: Get to ‘neutral’

Stock and bond distributions have a couple of advantages over other forms of passive income. For one, you don’t need much money to start. Buy one share (or even a partial share) of an ETF, and you’re in.

The other advantage is that it’s truly passive. The same can’t be said of real estate, says Dogen. Although profits he earns from his rental properties factor into his passive income calculation, he’s the first to tell you that managing properties requires time and effort.

“Being a landlord is not passive income. It’s semi-passive,” he says. “And if you’re unlucky, it’s active income with a lot of headaches.”

Getting into the landlord game might not be the place to start your passive income journey, but you’d still be wise to start saving for at least one down payment, Dogen says: your own.

“I recommend everybody get neutral real estate by owning your primary residence, especially if you know where you want to live for at least five years,” Dogen says.

Owning a home gets you to “neutral” on real estate, he says, because renters are counting on housing costs staying where they are or falling.

“You probably shouldn’t be renting forever, because there’s a history of real estate going up [in value],” Dogen says. By owning, you essentially ride the ups and downs of inflation and housing prices while building equity in your home at a regular, fixed cost.

A few years after you buy, your real housing costs will likely feel significantly cheaper, he says, because because your payments remain the same despite generally rising salaries and housing costs.

In short: “Once you get neutral real estate, life gets a little bit easier.”

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