A $5 million nest egg can last you decades, especially if you make smart investments that prioritize income generation. That requires a specific type of investment strategy, one that involves putting together a collection of assets that will generate the highest possible income for the lowest possible risk. Here is an overview of what to invest in to get steady, substantial income.
Companies that offer dividend-paying stocks pay a portion of profits to stockholders. The amount a stockholder gets is based on the number of shares they own. The dividend amount can shift based on the profitability of the company and the value of the share price. You’ll want to choose a company that has safe dividend payout ratios, which means they only distribute 40% to 50% of yearly profit and reinvest the rest into the business. In our current market, a dividend yield of 4 to 6 percent is usually considered good.
The company’s board has to approve all dividend amounts, and can also cancel dividends. Once you have purchased enough stock or made enough off of dividends, you can reinvest the money by purchasing more shares in that company or other companies.
Dividend stocks can be either common stocks or preferred stocks. With preferred stocks, dividend payouts have to go to preferred stockholders before common stockholders get paid. Preferred stock dividends might have a fixed interest rate or be designed to match a certain benchmark, which means there may be a quote in the issuing descriptions. This type of stock also usually has a debt feature that can pay a fixed dividend amount as well as an equity component.
Certificates of Deposit and Money Market Accounts
Both of these are safe investments and are insured by the Federal Deposit Insurance Corporation (FDIC), which means you get your money back if your bank goes bankrupt. A certificate of deposit (CD) and a money market account are FDIC insured for up to $250,000 per individual, and $500,000 per joint account.
There are some cons to CDs and money market accounts. First of all, there are typically minimum deposit requirements. And when you buy a CD you can’t cash out your money until it matures, or you incur a penalty.
The rate paid by money markets and CDs is less than what you would expect to earn from stocks or income-producing mutual funds, so these shouldn’t be a primary choice for income-generation. But they’re safe and they’ll still earn you a decent amount of money. You can get an online money market account that recently was paying 2.2%.
An annuity is an insurance product where you make a one-time payment, or payments at regular intervals, in exchange for a guaranteed income for a set amount of time. The payments might begin right away, or at a predetermined date in the future.
There are many different types of annuities available. You can get a lifetime annuity, which will last until you pass away. You can get a fixed annuity, which allows you to know the rate of return, how much you get, how long you’re getting it for and when you’re getting it. Annuities, which are generally low-risk and low-growth products, often come with high fees.
You could buy a property, or multiple properties, to rent out. You can get a consistent income from your rental property, and the value of your property may also increase over time, which can gain you more money in equity in addition to your regular rental income. Real estate can generate a lot of largely passive income. If you hire a good property manager, you may be able to do relatively little work for a lot of income generation. In addition, owning a physical property can help protect you against high inflation, since the value of your property will generally increase with inflation.
However, if you choose to invest in real estate, remember that closing costs and property taxes will take a chunk of your income. You’ll also need to maintain the property. Keep these costs in mind when considering how much income you are aiming to get.
If you don’t want to actually buy or rent a property yourself, look into a real estate investment trust (REIT). REITs are companies that own income-generating rental properties or own the mortgages on the properties. REITs usually focus on one aspect of real estate, such as commercial or residential. However, you can find hybrid REITs that include both. REIT shares are available for purchase through a company or fund.
Master Limited Partnerships
Master limited partnerships or MLPs are a way to invest for high yields, beyond traditional stocks and bonds. MLPs can trade on an exchange just like a stock.
MLPs have significant return potential. According to the Alerian MLP Index, which measures energy infrastructure MLPs, they offered an average yield of 10.19% through December 2019. That far outpaced the 1.88% average yield offered by the S&P 500 or even the 3.51% average yield associated with real estate investment trusts.
MLPs can offer better returns to investors than bonds. The latter tend to be more sensitive to rising and falling interest rates. In addition to providing higher yields, MLP returns may offer more stablity and consistency compared to other investments.
The Bottom Line
There are a lot of investing options with $5 million. If you’re investing without the help of a financial advisor, you’ll want to make sure your investments are safe for your level of investment experience. If you’re a beginner, you may want to start with investments like ETFs or index funds. Before you pick an investment, you should consider your risk tolerance, and how each investment may align with your future financial goals.
- Consider talking to a financial advisor about investing $5 million for income. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
- While you’re deciding what you want to do with your $5 million, you can put some of the cash in an interest-yielding savings account. You’ll earn interest while deciding if you want to find a longer-term investment. And don’t worry, you can withdraw the money at any time.
Photo credit: ©iStock.com/Lloret, ©iStock.com/designer491, ©iStock.com/industryview