Here’s How to Build a Portfolio Generating $100,000 In Passive Income Each Year

Portfolio construction can be a finicky game. Investors have a myriad of asset classes to choose from. And within each asset class, there are sectors or durations to consider that can make choosing between varying options quite a challenge.

In this article, I’m going to assume most readers will want to hear about a diversified approach to generating a given target. I chose $100,000 per year as a ballpark estimate, as that’s what many retirees would love to live off of (over and above social security, pensions, and other sources of income). For those in such a boat, looking for a road map of specific assets that may generate such performance, let’s dive into three groupings of assets and specific holdings within each asset class that investors can rely on for such dividend income over long periods of time.

I’m going to assume an overall average yield of around 5% for this portfolio of assets which can generate $100,000 in annual income. That means investors looking for such a passive income stream will need to have at least $2 million invested. That sounds like a large number, but as all the experts say, the sooner you start…

With that said, it should be noted I’m going to talk stocks, bonds and REITs in this three-part piece. Let’s dive in!

Dividend Stocks

Dividend visual

I’m a long-term believer in the idea that equities ought to play a major role in retirement planning for most households. The thing is, for those looking to generate considerable yield, picking and choosing individual stocks that fit this profile can be trickier than it may seem on the surface.

That’s because many of the highest-yielding stocks are also the riskiest. That stands to reason, given that yields move inversely to price. So, if a given stock sees its dividend yield shoot higher (and that’s not because of some massive dividend increase or special dividend), it means that this is a stock in the midst of a signifiant downturn. And when a company that pays a hefty dividend finds itself in such a situation, that’s the market implying that a dividend cut is likely on the horizon.

That said, there happen to be a number of top S&P 500 stocks that fit the description of long-term holdings with meaningful yields in the 5% range worth considering. Among my top picks in this group has to be AT&T (NYSE:T), Pfizer (NYSE:PFE) and Altria Group (NYSE:MO). Each company pays a yield that averages out to more than 5%, making an individual investor or household’s goal of bringing in $100,000 per year on a portfolio of $2 million feasible. 

Fixed Income (Bonds)

The word “bonds” spelled out using wooden blocks

Bonds play an integral role in not only providing the necessary passive income retirees may be looking for, but portfolio stability as well. Indeed, during market downturns, central banks around the world tend to lower interest rates, often to the lower bound. When this happens, yields come down (so those who locked in higher yields during periods of inflation or upticks in the market can benefit disproportionately, especially compared to those who hold portfolios consisting of equities only. 

Within the bond world, I dabble in a mix of medium to long-duration bonds, and buy these bonds outright. However, for some investors, buying bond-backed index funds or ETFs may be a better choice.

Within this grouping, I think the iShares 20+ Year Treasury Bond ETF (TLT) is the way to go. I like bonds because of their stability, and U.S. Treasurys are about as safe as they come. Accordingly, for those looking out to balance some of the risk of holding higher-yielding stocks and REITs (more on that below), holding some exposure to bonds is an excellent idea. 

Of note, this ETF currently provides a yield a bit above 4.3% at the time of writing, so that’s a decent yield investors are able to lock in today, and one I think definitely makes sense for the more cautious investors out there. 

Real Estate

Image of an apartment building under construction

Aside from owning one’s personal residence, or perhaps having a vacation or rental property one relies on for income, owning Real Estate Investment Trusts (REITs) is a great long-term investing strategy for those looking to own a portfolio of real estate (but don’t have tens of millions of dollars to put up to do so). 

What REITs do is effectively pool capital together from retail and institutional investors to buy, build, and manage real estate around the world. Some REITs are focused on specific geographies, with others aimed at specific sub-sectors of the real estate market (commercial, industrial, residential, mixed-use, etc.). 

I’ve yet to find a REIT that I’ve found attractive enough to pull the trigger on, and am personally researching this space to find the ideal option for my long-term portfolio. That said, there are a number of high-quality REITs worth considering with yields well above 5%, and distributions I’d consider to be rock-solid.

The reason why REITs can offer higher yields than other stocks is the fact that most are regulated, and need to provide 90% or more of their net income to investors in the form of distributions. For those seeking such returns, this is an excellent space to consider and is one I’ve got my eye on right now (want to pull the trigger when we do ultimately see housing prices come down more considerably – a move I think is coming).