Having $2 million to invest can ensure a lifetime income stream, provided it is wisely invested. So if you have managed to amass such a sum – whether through prudent money management, a lottery win or an inheritance – you should think long and hard about an investment portfolio that will turn your money into a reliable income stream. A financial advisor can put together an investing plan that does just that, but if you’d like to do it yourself, here are some investment options that can turn your money into income.
Bonds are structured debt sold by corporations, the federal government or its agencies and municipal governments, whose bonds are often tax free. Bonds are seen as a complement to equities for their stability and interest payments. A bond note is paid off over a period of years, at the end of which a bond is considered mature and the borrower has to pay back the full value of the loan, typically the face value of the bond.
You can invest in bonds directly or through funds. The latter option frees investors from having to wait for a bond to mature to sell; they can sell anytime. Prices for bonds and bond funds depend on three factors: interest rates; length of maturity; and rating (risky to very secure).
Some investors use dividend stocks to build long-term wealth. With a dividend stock, the company will pay out a portion of its profits to stockholders. Dividend amounts can fluctuate depending on the profitability of the company. The dividend yield can also vary depending on the fluctuation of the share price. All dividend amounts must be approved by the company’s board, which can also cancel dividends.
Once you begin to build your portfolio to thousands of shares, you can then reinvest your dividends to purchase more shares. One weakness with dividend stocks is double taxation. Corporations pay taxes on their earnings before they pay dividends and then individual stockholders often pay an additional tax on this income.
Preferred stocks are different from common stocks in that dividend payouts must go to preferred stockholders before common stockholders get paid. These dividends may have a fixed interest rate or may try to match a certain benchmark, such as LIBOR. This means that there may be a quote in the issuing descriptions.
This type of stock usually has a debt feature that may pay a fixed dividend amount as well as an equity component that may help the price of the share increase. This type of investment entices investors who seek the potential of stable future cash flow.
Bond Mutual Funds and Bond ETFs
A bond fund is a mutual fund or exchange-traded fund that includes a mix of different bonds and other debt instruments. Investors pool their money in the same way they would in a stock mutual fund. But whereas a bond itself does not lose value a bond fund can lose value, for example, if the bond fund manager has to sell holdings in a rising interest rate environment.
Some bond funds focus solely on short-term investments. Others are designed for the buy-and-hold investor. Certain funds may attempt to track a specific benchmark or index. As with any mutual fund, fixed-income investors have many choices: investment-grade; high-yield; municipal; multisector; and international.
Keep in mind that bond ETFs trade in real time, but bond mutual funds are priced at the close of each day’s trading.
Master Limited Partnerships
Master limited partnerships or MLPs are a way to invest for high yields. They are pass-through entities, which means the business itself isn’t subject to corporate income taxes. Instead, the income tax liability is passed through to investors, known as unitholders. Earnings are only taxed once, at the investor’s ordinary income tax rate. In that sense, MLP distributions are similar to the dividends from a dividend-paying stock or mutual fund. You can invest in MLPs directly or through funds. Oil and natural gas pipeline companies are often structured as MLPs.
Another way to invest $2 million for income is to buy rental properties. If you invest in the right markets, you may be able to see high returns. For example, if you purchase 10 rentals that average $100,000 each and rent them for $1,000 per month, per property. It’s important to account for closing costs, which may be around $3,000 per rental. This could lower your profit to $120,000 after five years.
But if your rental properties increased in value by 3% every year you may gain an extra $150,000 in equity. Between your cash flow and the equity of the rentals, you may have enough income to help support your lifestyle. Many investors view owning real estate as a key component of their financial plan because investing in real estate can generate large sums of (mostly passive) income.
If you don’t want the headaches of owning rental properties, consider a real estate investment trust, or REIT. These are companies that either own income-generating rentals or own the mortgages on those properties. Usually, REITs focus on one section of real estate, such as residential or commercial, but you can also find hybrids that have a variety of assets. You can purchase REIT shares through a company or a fund.
An annuity is an insurance policy where you pay, either once or periodically, in return for a guaranteed income. The payments may begin right away or at a specified future date. The payments may last until you pass away or only for a predetermined period. It all depends on what type of annuity you have, and there are many types available. Think of annuities as both low-risk and low-growth investments.
For example, an annuity with a $200,000 premium might offer the holder a monthly payout of $833.34. Over the course of a year that amounts to $10,000.08, meaning the payout rate is approximately 5%.
Peer-to-peer lending is a form of lending or borrowing that uses money from individual investors instead of banks or other financial institutions. Usually, an online platform, such as LendingTree, will bring together borrowers who need funds and investors willing to lend. When investing in a peer-to-peer lending platform you will get notes that represent slivers of many of the platform’s loans. For example, a $10,000 investment could give you small stakes in hundreds of loans.
The return, though, can be much better than other fixed-income investments. Interest rates can range from nearly 10% to more than 30%. Know the risks: lenders can default; there’s no FDIC insurance; and underwriting standards are not up to the standard that banks use.
The Bottom Line
With $2 million to invest for income generation you have plenty of options. Some investments are perfect for beginners, like ETFs, while others require more experience, like peer-to-peer lending. Each type of investment offers a different level of risk and reward. Before selecting an investment, investors should consider their asset allocation and how each investment may align with their goals.
- A financial advisor can help you put together a portfolio of income-generating investments. 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.
- Do you know how these income-generating investments can affect the risk built into your portfolio or what kind of bite will taxes and inflation take out of your investments? SmartAsset’s free investing guide can help answer some of these questions.
Photo credit: ©iStock.com/imagedepotpro, ©iStock.com/Pekic, ©iStock.com/Mehaniq