The passive income pitch

Sit back, do nothing, collect a paycheck. Before buying in, check whether the promoter's own income comes from selling you courses, subscriptions and coaching.

“The world of passive income is fertile ground for grifters, scammers and charlatans.”

The honest version

Own cash-generating securities in a brokerage account. With a big enough portfolio, the payouts can cover part or all of your living expenses.

Three ways cash arrives

Dividend stocks, interest-bearing bonds, and increasingly ETF distributions. Some ETFs hold dividend payers, some hold bonds, some sell derivatives like covered calls.

Income is not free

On the ex-distribution date, an ETF's net asset value drops by roughly the payout. That money left the fund and landed in your account. Nothing was created.

“Income is not free.”

Long horizon, different answer

If you do not need the cash now, reinvest it or hold funds with stronger appreciation potential and let the portfolio compound instead.

Total return is the yardstick

A double-digit yield does not make a superior investment. High payouts help retirees drawing down and FIRE investors who need recurring cash, but returns still decide.

“Total return remains the yardstick for evaluating an investment's performance.”

Yield needs context

Someone pulling $40,000 from $1 million needs a very different yield than someone pulling $40,000 from $500,000. Start with your withdrawal, not the headline number.

Yields move

Bond yields track interest rates and credit conditions. Stock dividends can be raised, held or cut. Today's distribution rate is not a promised future payout.

“Today's distribution rate should not be treated as a guaranteed future payout.”

Monthly beats quarterly

Most ETFs pay quarterly. Monthly payers, and a small group of weekly ones, make it easier to line income up against recurring bills.

Know the calendar

The ex-distribution date decides who gets paid, the payment date decides when the cash lands. Providers publish schedules early, but amounts often come late.

Not all income is taxed alike

A distribution can be ordinary income, qualified dividends, capital gains, tax-exempt interest or return of capital. After-tax yield matters more than the headline rate.

Selling shares is an option

Get past the psychological split between income and selling, and you gain flexibility. Selling a few shares yourself produces a similar result on your own timing.

How the five were picked

At least $500 million in assets, a 3% minimum 30-day SEC yield where applicable, and an expense ratio capped at 0.35%, roughly $35 a year per $10,000.

TBLL for sleeping at night

Invesco Short Term Treasury holds T-bills maturing within 12 months. A 3.7% yield, 0.08% fees, government credit backing and very little rate sensitivity.

TBLL's trade-off

You get close to the risk-free rate and little more, since almost no credit or duration risk is taken. The Treasury interest is generally exempt from state and local tax.

HYMB shelters from the IRS

State Street's high yield muni ETF buys state and local government debt, including below investment grade. A 4.9% yield that works out to an 8.2% tax-equivalent yield at the top federal rate.

SCYB pays for junk risk

Schwab High Yield Bond spreads 1,800-plus bonds across issuers for a 7.0% yield at a 0.03% fee. Roughly 60% BB, 30% B, 8% CCC.

Default math to respect

S&P Global's three-year cumulative default rates: 0.9% for BBB, 4.2% at BB, 12.4% at B, and 45.7% for CCC/CC. That interest is taxed as ordinary income, so a Roth IRA helps.

HDV for taxable accounts

iShares Core High Dividend holds 75 U.S. dividend payers screened on moat, uncertainty and distance to default. Now monthly, 3.4% yield, 0.08% fees, mostly qualified dividends.

ROCY defers the bill

JPMorgan's fund sells S&P 500 call spreads for a 7.9% distribution. Much of it is return of capital, which cuts your cost basis rather than taxing you now.

“the tax liability has generally been postponed rather than eliminated”