How I Plan to Create My Own $60,000 Annual Income in Just 6 Years – Seeking Your Thoughts

It’s a dream to be able to live solely off the dividends from one’s portfolio, as one leaves the invested principal untouched so that it can keep growing over time. Of course, withdrawing 4% or so every year is sufficient, but one would have to pick and choose which stocks, REITs, or ETFs to sell. And if they’re still marching higher, one could take a bit of a growth edge out of their portfolios every year.

In any case, let’s check in with a Reddit user who managed to create a passive income stream from scratch. They’ve managed to accumulate enough capital such that it pays out $40,000 in pre-tax income every single year. Over the next six years, they hope to boost this passive income figure by 50%. And once they do, they’re off to Thailand or Japan to retire in their early 40s. 

Let’s check in on their strategy and evaluate its practicality for prospective early retirees who are hoping to do the same. Though going for slightly higher yields does entail greater risk, such risks can be worth the potential rewards, especially if one’s put in the due diligence to ensure that their dividends and distributions will be in good standing even once a recession inevitably hits. Without further ado, let’s jump into the details, and I’ll chime in!

Passive income to the max: Is this passive income investor reaching a bit too far for yield?

Overreaching for yield to fund one’s passive income dreams can be a risky move. As the great Warren Buffett once said, “Reaching for yield is really stupid, but it’s very human.” Such comments were made at a time when interest rates were at a trough, and it was incredibly difficult to score a higher yield without taking on significantly more risk. Nowadays, interest rates are in a middle ground of sorts, with yields on the 10-year U.S. Treasury note just north of the 4% mark.

And while it’s easy to average a 4-5% yield without exposing oneself to detrimental risks in this environment, I do think that those with a higher risk tolerance may be able to score yields just a bit higher without running into serious trouble. Indeed, various ETFs were designed to offer more income without putting passive income investors in harm’s way. Indeed, whether we’re talking about covered call ETFs, which trade off some upside potential for a slightly higher dividend, or some other specialty income ETF aimed at investors who care more about yield than capital gains, there are products out there that can allow one to get more yield without having to risk one’s shirt.

Back to the income-savvy Reddit user. They have an average portfolio yield of 7.4%, which is on the high side, even in today’s environment. The big question is whether they’re reaching a bit too far for the extra yield.

Looking underneath the hood, we have a bunch of very high-quality ETFs, including the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) and the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ), which currently yield 7.5% and 10.9%, respectively. Though there aren’t many individual names, one that stands out is Reality Income Corp. (NYSE:O), which sports a fat 5.6% yield. Surprisingly, there’s nothing within the Reddit user’s portfolio that screams danger.

Covered calls for an income boost?

Arguably, the JEPI and JEPQ can act as a solid one-two combo for yield seekers who are all right with riding out the market rollercoaster if it means getting paid handsomely to do so. Both the JEPI and JEPQ make good use of covered call strategies to bolster income. As always, there’s a trade-off when it comes to covered calls.

While the higher yields don’t necessarily entail danger, it’s important to note that the yields on such ETFs can fluctuate based on stock market volatility and what option premiums are going for at any given time. Additionally, capital gains will be harder to come by versus a more traditional equity ETF that mirrors the S&P 500 or Nasdaq 100.

In any case, I have mixed feelings about overweighting covered call ETFs like the JEPI and JEPQ. They’re not without their fair share of risks, and there’s a lot of growth that’s given up for the higher upfront yield. But, at the same time, I believe they’re one of the less risky ways to pursue colossal yields for those keen on reaching for yields above the 7% mark. 

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