March 02, 2021

Why are Passive Income Streams Important?

by Sara Wensley

Director, Growth and Marketing

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Why are Passive Income Streams Important?
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When trying to grow wealth and determine portfolio allocation to reach financial goals, passive income streams are an important inclusion in any diversification strategy.

When trying to grow wealth and determine portfolio allocation to reach financial goals, passive income streams are an important inclusion in any diversification strategy. Passive income streams are lower-risk investments that generate returns with no investment of time or money—in other words, you can literally reap rewards while you sleep.

What is a passive income stream?

A passive income stream is income earned with no engagement for an individual earning this income. As an investor in a passive income stream, you don’t put in time and effort to manage these kinds of financial assets, in contrast to active income, in which you’re investing time and skills in exchange for dividends.

With passive income streams, you can always be earning without putting in work. There’ll be a small upfront investment of time to set up your passive income stream—whether that’s creating something, activating an account, or working with a platform to get you set up with your investment—but, thereafter, it’s not a financial asset that you need to manage. These types of investments are debt- or equity-structured, which means you make a capital investment only once to receive residual income payments.

Passive income streams also often have a lower cost to entry, depending on the type of asset. Some come with a lower rate of return in exchange for less volatility, while others may offer a larger dividend but at a relatively higher amount of risk. If you work with a financial professional or an investment technology platform such as FarmTogether, they’ll let you know the structure of your investment, its risk, and what you can expect with regard to returns.

Examples of passive income streams

Passive income streams take many different forms; they can be things such as creative assets, common financial products, or alternative investments. Here are a few, wide-ranging examples of types of passive income streams:

  • Fixed-income and bond ladders
  • Creative assets for which you receive royalties upon use, such as books, music, or photographs
  • Real estate investment trusts (REITs)
  • Dividend stocks
  • Interest-bearing savings accounts and CDs
  • Agricultural investing

This is certainly not an exhaustive list, but could help serve as a guide as to where to look when you’re identifying the right passive income investments for you.

The importance of passive income streams

Passive income is a cornerstone of a wealth-growth strategy. Having a solid foundation of returns that don’t require active management can keep a steady inflow of cash for your portfolio or life expenses. With a certain amount of income set on auto-pilot, you can take more aggressive investing stances elsewhere with a bit more comfort, and help hedge your profile against market volatility and economic recession.

Plus, you only have so much time to invest in making money—whether that takes the form of a job that generates income, or active money management with other investments. Once a passive investment stream is established, it’s a kind of set-it-and-forget it asset. In short, generating wealth doesn’t take any time on your part.

Passive income stream risks and returns

Passive income streams are meant to be hands-off investments that generate low-risk returns. As you’re not actively managing this type of investment, your returns won’t be high as compared to other investments, such as investments in equities that you’ll need to watch, or even working a job in which you’re earning a salary or contract fee. Instead, the core idea of passive income streams is their stability—which, naturally, is a tradeoff for outsized returns. You shouldn’t expect to beat indices such as the S&P 500.

There are, of course, some risks in passive investments as there are in any investments. For instance, say you invest in real estate; if the value of the real estate goes down, your investment may yield lower dividends or even cease to yield returns. However, the idea of passive income streams in general is that they’re often relatively safer financial instruments and investments.

Passive income stream distributions

Passive income stream payouts work a few different ways. Depending on the structure of the passive investment, distributions occur at fixed intervals, while others, such as royalty payments, may come more sporadically when the asset is purchased.

For example, with farmland investing from FarmTogether, you’ll receive returns via price appreciation at the end of the hold period as well as ongoing income payments. These are at fixed intervals, such as quarterly, semi-annual, or annual bases, and the distributions are deposited directly into your bank account as an investor. The size of the distribution is contingent on the income for the years of the investment.

The connection between passive income streams and recession-resistant investing

A significant number of assets are directly correlated with financial markets, which means that returns on these investments are contingent on market performance. Here, volatility is a major factor—market dips inversely affect dividends. On the other hand, passive income streams are generally more independent from market movement, which makes them stronger bets for recession-resistant investing. Agricultural investment is a perfect example of an asset-based alternative.

Passive income streams and alternative investing

Although the conversation about passive income tends to focus on less volatile investment vehicles, such as mutual funds, REITs, and fixed income products, there are other options, too, particularly in emerging sectors.

Many passive income streams can come from alternative investment opportunities. Many may even offer a potentially higher rate of return than their counterparts. Granted, alternative investments don’t necessarily come with the same risk-averse strategies as other passive income investments.

Farmland investing as an alternative asset class

If you’re interested in exploring alternative investing that can generate passive income, farmland investing and agriculture investing is a strong option to look into. The demand for responsibly sourced food has grown significantly as consumer interest in sustainability expands, which has created strong opportunities for investors in the previously lower-profile agriculture sector.

Farmland investing is made easy with FarmTogether. Importantly, we do the due diligence to make sure that the investments opportunities are strong, and enable investors to avoid building a portfolio from scratch, and keeping tabs on performance on one’s own. FarmTogether identifies promising opportunities in the agricultural sector and enables investors to understand their passive income stream with its platform.

Learning about farmland investing for a passive income stream

FarmTogether’s investment technology scouts and vets investment opportunities in farmland to generate passive income with strong returns. Our investment strategy empowers accredited investors to build value while providing farmers access to the capital they need to grow their businesses.

Interested in Learning More About Farmland as an Asset Class?

Click here to see farmland's historical performance, visit our FAQ to learn more about investing with FarmTogether, or get started today by visiting ways to invest.

Disclaimer: FarmTogether is not a registered broker-dealer, investment advisor or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.

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