Sometimes the best answer is the one that few people are talking about. That’s true on several fronts. And it could be especially applicable when it comes to generating passive income.
You can easily find out plenty of good ideas on the subject. I’ve written recently about some of them, including investing in high-yield dividend stocks and closed-end funds and selling covered calls. But there’s one approach that is sort of flying under the radar right now. Here’s a great way to make passive income you probably won’t hear much about these days.
An out-of-favor idea
You can earn passive income by investing in growth stocks and selling shares on a regular basis. If you need more income at any time, you can sell more shares. If there are times when you don’t need the income, you can hold off on selling.
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There’s an obvious reason why this idea is out of favor right now. Growth stocks have taken a shellacking in recent months.
The Invesco QQQ Trust Series (NASDAQ:QQQ) ETF is a pretty good proxy for growth stocks. This ETF tracks the Nasdaq-100 Index, which contains some of the top growth stocks on the market. The Nasdaq-100 is currently in a bear market — and so is the QQQ.
Selling shares when they’re down so much usually isn’t a good idea. But to generate passive income from investing in growth stocks, that’s exactly what you must do at times.
Why it’s a good approach
Over the long term, investing in growth stocks will probably beat most alternatives for generating income. Why? The approach delivers greater total returns.
As a case in point, let’s compare how the QQQ ETF has performed compared to the total returns achieved by other passive income alternatives. I’ve included the following as proxies for several other approaches:
- Vanguard High Dividend Yield ETF (NYSEMKT: VYM) — high-yield dividend stocks
- AllianceBernstein Global High Income Fund (NYSE:AWF) — closed-end funds
- GlobalX Nasdaq 100 Covered Call ETF (NASDAQ:QYLD) — covered calls
How does the QQQ’s total return stack up against these proxies for other passive income methods? It’s not even close.
Granted, this comparison only goes back to 2014 (when QYLD launched). However, even when we compare the QQQ’s total return against the other ETFs that have been available for longer periods, it still comes out on top.
The bottom line is that investing in a large basket of growth stocks (with QQQ as a stand-in) can be a great way to make passive income. The most important part of the strategy, though, is that you must take a long-term view.
There are some definite psychological hurdles to investing in growth stocks to earn passive income. And they could cause some investors to shy away from the strategy.
Timing can make a big difference. For example, investing a lot of money upfront at the peak last year could make it really painful to sell shares now to generate income. On the other hand, selling shares wouldn’t hurt nearly as much if you invested heavily before growth stocks skyrocketed during the last bull market.
It’s understandable why many investors prefer other ways of making passive income, especially buying high-yield dividend stocks. They like to be able to count on those dividend payments rolling in every quarter (or in some cases, every month).
However, if you can overcome these hurdles, buying growth stocks and selling shares as you need income could make you more money over the long run than other approaches. With the current steep sell-off in growth stocks, now could be a good time to get started with this approach.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.