79: 3 Additional Ways to Generate Passive Income (2024)

0:00Rinse takes your laundry and hand delivers it to your door. expertly cleaned and folded so you could take the time once spent folding and sorting and waiting to finally pursue a whole new version of you like tea time you or this tea time you or even this tea time you said you hear about Dave or even tea time tea time tea time you so update on Dave it's up to you we'll take the laundry rinse it's time to be great when you walk into a Burlington you're walking into amazing prices and great gifts. That's main character energy. Because at Burlington, the holiday savings aren't the only things turning heads.

0:41Discover quality finds and perfect presents for everyone on your list, even those who are hard to shop for. Toys and jewelry to new beauty brands and styles, these gifts go seamlessly from our stores to under your tree. Seriously, with these savings, why shop anywhere else? Hey everyone and welcome back to the Rich Habits Podcast, a top 10 business podcast on Spotify. My name is Austin Hankwitz and I'm joined by my co-host Robert Croak. Robert is a seasoned entrepreneur in his 50s with lifetime revenue of over$300 million and I'm an entrepreneur in my late 20s with a background in finance and economics.

1:19Since quitting my full-time job in corporate finance a few years ago, I built a seven-figure media business and actively advise some of the most well-known fintech companies around the world. Now, as the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives, one from an industry veteran, which is Robert, and the other myself, someone who's still in the process of building wealth and figuring it all out. So Robert, what are we going to be talking about in today's episode? Yes. In this episode of the Rich Habits Podcast, we're going to share three additional ways anyone listening right now can generate yield inside of their portfolio.

1:56The reason we're introducing additional ways is because as everyone likely knows, the Federal Reserve is expected to begin cutting rates in September. The underlying theme of these three additional ways is to generate passive income in a lower interest rate environment as a lot of things can change when the Fed cuts rates. Yeah, to Robert's point, we pride ourselves in ensuring all of you are informed and you can make educated decisions with your money. And the Fed has been raising interest rates now since March of 2022, and again, expected to begin cutting them in September. So that's not only a massive shift with your money, as we covered in episode 75, but also your investments.

2:34So in this episode, we're going to introduce three additional ways that you can generate yield in your portfolio in a low interest rate environment from the Federal Reserve, as well as explain why we think these new ways deserve a specific mention on a podcast episode. Yeah, I'm definitely excited because we always talk about diversity and diversifying these investments. And that can change over time too, as far as what makes the most sense based on the current economic environment. And that's why I think this episode is really telling for what we're looking at in the next six, eight, 12, 18 months.

3:08So I'm super excited to dig in. All right, Robert, what is the first new additional way that people can begin generating yield inside of their portfolios? Yes, real estate investment trust. REITs. You all know we've talked about REITs in the past, but they haven't been as important to a well-diversified portfolio as they are today. As you all might remember, a real estate investment trust is a company that owns, operates, and sometimes even finances real estate to generate income for their shareholders. Similar to stocks, REITs trade on exchanges like the NASDAQ or the New York Stock Exchange, but unlike stocks, REITs by law have to pay out 90 % of their annual profit to shareholders in the form of dividends, offering some very attractive yields depending on the REIT.

3:55There are different types of REITs for just about anything you can think of, hotels, casinos, cell towers, data centers, and even golf courses. If it's related to real estate, there's probably a REIT for it. Now here's why we're revisiting the REIT investment idea. As you all know, the only way these REITs are able to pay their investors dividends is by collecting rents from their tenants and then passing that money through to their investors. The only way these dividends rise over time is by purchasing more real estate or by raising rents or doing both. Now over the last two plus years, interest rates have risen dramatically, especially for real estate, which also means the cost to borrow money and purchase these massive real estate deals has also risen dramatically.

4:41Now these costs bring down the profits for these REITs, which can lead to a decrease or sort of flatlining of the dividends they pay to their shareholders because profits are decreased or flat because of higher interest rates. However, now that interest rates are expected to come down, these REITs can borrow more money for less, allowing their deals to be even more profitable. More money is now expected to make its way down to their profit lines, which would cause them to be able to raise their dividends even more. This is why we've seen some of our favorite REITs like Realty Income Corporation, Bricksmore Property Group, and VICI Properties stock prices trade up over the last few weeks as investors are now expecting more and more profits caused by the lower interest rates around the corner.

5:26So again, just to get a little recap here, these companies pay out 90 % of their profits to their shareholders in the form of dividends. These profits are essentially just the rents that they collect from their tenants. Now they've gone out and they continue to buy big major real estate deals. But as we know, Robert, interest rates on mortgages and these massive loans have gone up to 4, 5, 6, 7, 8, 9, 10 percent, depending on the deal. The higher the interest rate means that these companies are paying more money to the banks every single month. And more money to the banks means less money paid to the shareholders.

5:56But as interest rates come down, they can refinance these loans, which they likely will do, allowing them to keep more money for themselves and pay more money to us, the shareholders. Yeah, and I think that is a really great takeaway because so many people, Austin, you and I even two, three years ago when we first met, we were talking about some of these REITs and then they took a really long breather where they, like you said, flatlined. And that was because of the cost of money. You hear us say all the time when we're looking at real estate deals that sometimes they don't pencil. And that is because of mortgage rates, interest rates and where we're at in this economic condition.

6:31So I think it's very important for everyone to understand that with diversification comes the shifting. And that's why we believe everyone should be actively managing or have someone help them actively manage their portfolios, whether it's in real estate, REITs, ETFs, or individual stocks or cryptocurrency. So very important point and very well highlighted, Austin. That was great. And in case you're kind of weary to pick a specific REIT or you don't understand the management team and you just want to invest into a basket of REITs like an ETF, you can check out VNQ. That's the ticker for the Vanguard Real Estate Index Fund ETF.

7:09And inside of their ETF is Realty Income Corporation, like I had mentioned. There's also Public Storage, Simon Property Group, Well Tower, American Tower Corporation, and a bunch of others, right? So if you're not someone who wants to pick a specific REIT, you don't know what's going on behind the scenes, you instead want just some exposure to REITs, this is an ETF that'll allow you to do that. And Robert, the ETF's up about 9.5 % over the last six months, 5 % over the last month alone. So that's pretty cool to see. Yeah, the REITs are definitely moving again. I'm excited. You know, we don't sell in these down, you know, turns.

7:41And so I'm really excited for this category and this episode because it really just enlightens people to the movements we're telling them, you know, that we like to do and giving those educational kind of aspirations of what to do in certain market conditions. So I really enjoy it. Well, speaking of movements, let's now move to the second idea, which are corporate bonds. Now, this one is very important for people who are just obsessed with that consistent yield in your portfolio. As you all know, public.com introduced their treasury bill product last year, allowing anyone to buy T-bills directly from their platform.

8:15It became incredibly popular. However, with the Fed cutting interest rates in September and going forward, the yields on these T-bills are expected to fall and sort of cut as well, from 5 % to maybe 4 % or even 3%. These yields move up and down with the federal funds rate, so if the Fed cuts, the yields are going to be cut too. So knowing that people love a good yield, public introduced their corporate bond account last week, putting investor money into now 10 different corporate bonds, paying a blended yield of 7.3%. Here's how it works. You open up a corporate bond account inside of public, you deposit a minimum of$1 ,000 into this account, then public will automatically purchase the corporate bonds needed to reach that 7.3%.

8:57The bonds have a maturity of four years, which means you're locking in this yield of 7.3 % for four entire years. Every month, you're going to get paid a dividend that equates again to that 7.3 % annual yield. Now, again, you earn this yield even if the Fed cuts rates. That's not the same as T-bills. Treasury bill yields move with the federal funds rate. Corporate bonds, you can lock those in for a long period of time. The first maturity on the bond account isn't until 2028, four years from now, allowing you to lock in that high yield on your money until then. Yeah. And the fees are straightforward for every thousand dollars worth of bonds you buy public charges you$5.

9:36It's pretty simple, straightforward. And for those of you who might not know how bonds work, they're simple. You give someone money, they pay you a yield against the money throughout the duration of the bond. And then they give you all of your money back at the end of that period. That is it straightforward. The corporate bonds that Publix are buying include Ford, they include WarnerMedia, and many more. Now, here to quickly explain the corporate bond product is Sam Knopfzinger, the GM of Publix Brokerage Operations. So Sam, thank you so much for joining us. Now, let's just jump right into it.

10:08Who's the type of investor that might want to lock in yields like this inside of their investment account? Well, I think it's applicable for a lot of different types of investors. The corporate bond account does take on a little bit of additional risk in the term of credit risk. And so by credit risk, what do we mean by this? We say, hey, right, if we guarantee that the U.S. government is paying us back, we're not so sure that company A is as highly rated as the U.S. government. So we're going to want a little bit more in yield from that company in case they run into trouble. So you can earn a little bit more yield while taking a little bit more risk.

10:36But we think, you know, given the environment and given where, you know, rates are headed, we think that a little bit more risk, you know, to get a little bit more yield in this environment, you know, may make sense for a lot of investors. And how did you select these specific corporate bonds? It seems like they're all highly triple B rated bonds. And just how did you select these? So when we wanted to offer a member a variety of yields, and a lot of the corporate bond space, you know, yields are actually very, very low. So if you look at an Apple bond or other similarly AAA rated corporate bonds, you know, they're yielding similar to cash.

11:05And we already have, you know, similar yields on our offering, you know, that can support yields in the 5%, you know, 5.5%. And so we said, hey, you know, how do we find yields that are a little bit more than what we're currently seeing in a lot of the different parts in the market? You know, can we get a 6.5 % yield? Can we get a 7 % yield? And in order to do that, you know, you do unfortunately have to take a little bit more credit risk, right? A little bit more risk in your portfolio, but you do see that pickup in yield. And so when we looked at it, we didn't want to go too much into the high yield space, too into the junk space.

11:29We didn't want to take that much risk because there is risk there, but we wanted still to earn that yield. And so we kind of balanced it, hey, how do we differentiate the product from treasuries, get a really, really high yield, but not take on necessarily as much risk as you might see in the junk market. I think that's a great explanation. And for those people listening, right? Credit risk again, as Sam was explaining, I mean, this is debt. that in these examples, Ford is taking on by issuing bonds. And so they have to pay their sort of bondholders back on the debt that was lent to them. And so if Ford goes bankrupt for whatever reason, right, they're not going to pay you back.

12:04And so that's the credit risk that Sam's trying to explain. And the correlation between the riskier the company is, maybe they have a bad balance sheet, maybe they're not growing anymore, right? That means a higher yield. So to compensate state you, for the risk, they're giving you a higher yield, which is why to Sam's point, Apple or Microsoft or these other massive technology companies that have hundreds of billions of dollars on their balance sheet, they're not going to give you a high yield because why should they? They're going to be around for a long time. Now, I just went to your website.

12:31I clicked on open a bond account. I opened the account. I put in a thousand dollars. I mean, is it really that simple? It is that simple. We try to make it extremely easy for folks to access a variety of portfolio of bonds. Similarly, you can also open an account and buy over 10 ,000 different individual bonds on our platform. So, you know, if these bonds aren't, you know, suitable for you, or if you look at this portfolio, you say, hey, I want to take more risk, or I want to take less risk, you know, you can construct, you know, any different type of, you know, bond portfolio on the platform and choose their own bonds if you want.

12:59That's awesome, man. Congrats on building such an easy product, because I think at the end of the day, what you guys are doing is sort of bridging this separation between institutions for decades now have had bonds in their back pocket, they've been able to trade them, they got commodities, They got fractional ownership of all these crazy things that they can just do because they have the money. But the retail investor like myself and Robert, we haven't had that opportunity until now. And you guys are just bridging that gap. And I just really want to commend you for it. Well, I really appreciate that, Austin.

13:25And the second part of that is education. Bonds are not easy, right? Stocks, buy a share of Apple stock, not that hard. You look at a bond page, there's numbers everywhere. What's going on? So what we wanted to do is kind of combine it in an account and kind of hide away a lot of the complexity of it. Because at the end of the day, these are just cash flows that are coming into your portfolio. And that's all we really want you to take away from this is that this is a yield product. It's another way to earn yield slightly higher, right, than some risk-free products out there. But we think in this environment, you know, it's a good path forward for folks who still want to keep that yield train going.

13:54And I think that's one of the key to success over the years for public is really taking more complex situations and making it simpler. When you and I first talked, Austin, about T-bills a couple of years ago, it was so hard going on to the treasury website and it felt like it was 1988 trying to buy a treasury bill compared to Publix offering and making it so simple and that's why I just love how you public.com present these opportunities to the retail investor and the everyday person because you make it so much easier for them to understand and the timing of this product is really really quite remarkable So why now for this bond product?

14:36And how long do you think this will be a good opportunity for people, given our future lens of where the rates are going to go, the Fed rates are going to go, and what the economy is going to do? So I think it's a great product now. I think a lot of folks are looking towards next month and the months after that and say, hey, the Fed is going to drop rate. This 5 % interest rate I'm earning my cash, it's going to be 4.75, 4.5. Next year, maybe four, maybe three and a half, who knows? And so I think in this product, you can say, all right, Well, if I don't need this cash, right, you know, for the next, you know, six months, 12 months, couple of years, maybe there are better places for it.

15:07And so right now, if you can earn, you know, almost 7 % by, you know, essentially locking up your money, you know, for a couple of years, you know, if you trust these companies to pay you back over that timeframe. And I think even more so, no one can time the market, right? Timing the bond market is just as difficult as timing the stock market. But I think if you are nervous about the Fed dropping rates, right, and even more nervous than the market might be, it's an even better opportunity because you can, you know, take some of that risk off the table by locking up your money and guaranteeing yourself, a certain rate of return for the coming years.

15:34What we like to say is diversify your yield, right? You might want some in a higher-owned cash account. You might want some in some treasury bills. You might want some in some corporate bonds. There's no reason you have to pick one or the other. You can have a mix of both to suit your needs. I think that's a great answer. Diversify your yield. And that's, I mean, that's exactly what this whole episode's about, right? We talk about REITs. We talk about the corporate bonds and diversifying your yield. So no matter what happens in the stock market, you're always making that passive income in your portfolio.

15:58Sam, thank you so much for joining us on this episode of the Rich Habits Podcast. And we can't wait to have you back again very soon. There you have it, folks. Straight from the horse's mouth. So if you're looking for a cool way to add bonds to your portfolio, public has figured it out for you. Now, the last way that people can generate yield and this sort of new additional idea that Robert and I have come up with are small cap companies, specifically the Russell 2000. As we shared a few weeks back with Troy from Neos Investments, the Russell 2000 is an index of the 2 ,000 smallest companies inside of the Russell Index.

16:30The average market cap for the Russell 2000 is just a hair over$2.7 billion, which means these are not the mega cap technology companies that we all know and love. Instead, they are companies who are doing a few hundred million in revenue and maybe tens of millions in annual profits. Which is why, Robert, interest rate cuts are so important for these companies. The debt they take on are at 7, 8, 9, 10 percent. But now with the Fed cutting rates, that debt can be refinanced for much lower, having an outsized positive impact on their annual profits. This is why the Russell 2000 index historically outperforms the S &P 500 index during times of rate cuts.

17:09And from a yield perspective, IWMI is our chosen ETF. It holds all of the constituents of the Russell 2000, as well as it pays a 12 % annual yield via covered call contracts. 12 % yield while also having some upside potential sounds pretty good to me. So whether your portfolio is focused on growth stocks, big tech, dividend kings, or anywhere in between, these three new yield-focused ideas will likely fit nicely inside of your portfolios, portfolios give you that diversification and help you get through any of the bumpy roads we might see in the future. Robert, I love our podcast. It is so much fun because every week we have the opportunity to share with people actual ideas that are timely.

17:55Last week, we talked about how to prepare for a recession because the SOM rule was triggered. We saw that the non-farm payroll jobs were just taken down by 800 ,000. So a lot of recession fears are going around. We can immediately jump in and take charge of the conversation. Just like we did with episode 76, we had that crazy market crash with the Japanese yen carry trade on August 5th that pulled the markets down. We made an episode very quickly telling people what not to do when the markets crash. And again, we mentioned this on episode 75 here about how the Fed's interest rate cuts are going to impact you and your money.

18:26I just love the podcast. Every week, we're able to bring real time perspective, education, actionable ideas so that you can one, get inspired to begin to educate yourself on what we're talking about and three take action if this is applicable to you yeah it's important and it's also very rewarding for us because as we build the rich habits network larger and larger it's just great because we are always on that grind always studying always researching and even like looking at the news of the last 24 hours that bankruptcies have hit an all-time high since q2 of 2017 we are all over every single economic piece of data whether it's real estate or business oriented or crypto or whatever and then we share it all with everyone that follows along so i love it too because if we can give them even a little bit of an edge over the rest of the market then we've done our jobs to help them build their personal financial well-being and get them to retirement in a much more meaningful and early way to do it.

19:29So I love it every day, just like you do. Robert, can you believe now we have 240 people inside of the Rich Habits Network? 240 people. It feels like 17 times a day, someone's sending me a DM, having some perspective. Hey Austin, can you look into this? Did y 'all mention this on the podcast yet? They might be asking a question inside the Q &A section or watching a live stream recording that we hosted, which by the way, Robert and I hosted our first weekly live stream exclusively for the Rich Habits Network last Tuesday night. So if you want to start joining those live streams, ask your questions, get behind the scenes data on what we're doing with our money and how we're thinking about the economy, the Fed rate cuts, the jobless claims, everything in between.

20:08Join the Rich Habits Network. Prices will increase from$77 a month to$97 a month on September 1st. Lock in$77 a month before then and you'll get grandfathered in in perpetuity and we can't wait to see you there. I love it. All right, before we jump into the Q &A section of this podcast, as you guys know, Robert and I took$20 ,000 of our own money and we invested it into Freck to do their direct indexing with the S &P 500. So as you guys know, we give you once per month updates on that portfolio. So let me log into my Freck account here and show you where we're at. All right, Robert, here we go.

20:43That$20 ,000 we invested on June 6th is now worth$20 ,890.41, a 4.1 % return. However, if you look at the total return, the adjusted return, after you take out the cost basis lowering because we're doing some tax loss harvesting, it's now at 6.5%, which has outperformed that same 4.9 % total return the S &P 500 did on its own. So this is just so much fun, man. And we get to see our money work hard for us, FREC, their direct indexing, and all this tax loss harvesting they're doing was completely behind the scenes. They've done$426 of tax loss harvesting on our behalf and we didn't do anything. It's all automatic.

21:26But that's the beautiful thing of what we get to do every single day with the Rich Habits Podcast is flushing out these new opportunities, being first to bring FREC to the masses, bringing Publix new bond product to the masses, and really helping people find the best possible strategies and gains out there. Because we're not just sitting back talking about a target date fund where there's no real gains and people just sit back and get into a target date fund for 20 years and underperform the markets. We are always looking for the best of the best of what we can educate and share with our audience.

22:00And that's why I love doing this every single day. And what's so crazy too, again, is like we deposited$20 ,000, but our cost basis is$19 ,452, right? So that$550 difference is now added to our total return because it's offset with our tax loss harvesting. It is incredible. I did not know they were doing this. It's so fun. So it allows us to even outperform the indices that we are investing into. Now, alongside that, they launched a few new strategies to direct index, including the Russell 2000, something we just mentioned in this episode. This new expansion increases Freck's total offering to nine indices, establishing it as the first and sole consumer investment platform providing a diverse range of direct indexing options.

22:45They also announced that they just crossed over$100 million in assets under management, which is really, really cool. Robert, we contribute$20 ,000 to that$100 million. Look at us go. Yeah, and I want to establish one other point too for everyone listening today, and that is the minimum investment in FREC, if I understand correctly, is$20 ,000. So keep that in mind. It's not something like public or some of the other platforms where you can get in for$100. And with this minimum, it's because they are indexing the S &P 500 and these other indices. So they need that amount of cash and capital to start with.

23:20So just keep that in mind. It's a great strategy. We're doing very well with it. but just keep in mind there is a$20 ,000 minimum investment. That is entirely correct. It is a$20 ,000 minimum. So if you're thinking about, well, I don't have$20 ,000, maybe you do. Maybe it's already sitting in your bridge account, in your public account, maybe it's sitting somewhere else and you wanna then take that money that was already invested into the S &P 500 or the NASDAQ or the Russell or whatever index you're following and you wanna migrate it now into FREC because it can not only just be invested into the exact same thing, but tax loss harvested against automatically, right?