The Passive Income Scam

Lately it feels like the internet is full of passive income videos. Most popular finance YouTubers seem to constantly talk about their best passive income ideas and how they make (enter random ridiculously high amount of € or $) every week.

Is it all a scam or is any of it real? After all, I think we can all agree that earning money without doing anything sounds pretty sweet!

To answer this question, let’s review what four of the most popular YouTubers Graham Stephan, Andrei Jikh, Ali Abdaal and Mark Tilbury recommend you can do to generate passive income, find out if it actually exists (more specifically in Europe) and if yes, go over the few truly passive options that don’t require you to start a side hustle in pursuit of financial independence and early retirement.

7 Passive Income Ideas – How I Make 67k per Week by Mark Tilbury

This is the worst one out of the four by far. He even copied Ali Abdaal’s video title one to one, only changing the numbers.

Let’s see what he recommends (in no particular order):

1. Work on a side hustle to generate income later on

Side hustles are not passive and the reality is, your earnings start to dry up once you stop working on them.

2. Make online content

Making online content requires lots of work and dedication and you finding ways to monetize whatever you’re creating.

3. Private investing

In my opinion private investing is by far be the worst advice Mark Tilbury could have given 1,6 million strangers on YouTube without going into a lot more detail first. Basically he’s telling people to invest their money into someone else’s project, sometimes even a friend or family member, as a way to make passive income further down the line. As it turns out, you’re actually a lot more likely to lose all of your money, since the vast majority of startups fail.

4. Affiliate Marketing

Affiliate Marketing is once again far from passive, as it requires you to produce a lot of useful content and build a large community of followers first, which you then need to maintain so it doesn’t fizzle out.

5. Creating a digital tool

Again, creating a digital tool is tons of work. You also need to know how to code or pay someone else and find an opportunity where people would be willing to pay for your digital service. You of course also need to maintain your digital service and add more features over time, as competition will most likely be showing up quickly if you end up being successful.

Does that sound very passive to you?

6. Renting out your stuff

Renting out your stuff, like a room in your house or apartment, definitely requires less work up front if you have the space for it. Still, it’s still more of a mini job than a passive investment, since you’ll need to deal with tenants and their needs, clean up regularly or hire someone to do so etc.

7. Dividend paying stocks

Investing into dividend paying stocks is the only idea he mentioned that I would really consider passive. But more on that later.

9 Passive Income Ideas – How I Make 27k per Week by Ali Abdaal

Next up is Ali Abdaal, who usually gives solid productivity advice and doesn’t make videos about personal finance too frequently.

But, since his video is the most watched passive income video ever on YouTube and the most popular video on his channel we’re still going to review what he’s saying.

More side hustles pretending to be passive

To cut things short, the only option I agree with as a viable way to actually generate passive income in his video is investing in stocks and shares.

Here are the other passive income ideas he talks about:

• Starting a YouTube channel
• Starting a podcast
• Affiliate Marketing
• Creating and selling digital products or services
• Creating and automating a business
• Setting up a paid membership community

After digging a bit deeper into each of these options, you’ll quickly realize that all of them require you to put in countless hours of unpaid work first, in order to hopefully build a large community of loyal people that are interested in whatever you are sharing or selling.

While that may generate recurring income at some point, once you step away from your venture for a prolonged period of time, earnings usually start to dry up.

So I have to say that while it was an interesting video to watch, especially if you’re a creator thinking about starting an online business, 8 out of the 9 passive income ideas he mentioned were once again far from passive in my opinion.

My 6 BEST Passive Income Ideas For $100 A Day by Andrei Jikh

Let’s move on to the popular personal finance YouTuber Andrei Jikh and look at his best passive income ideas.

1. Creating an online business

Creating an online business is certainly not passive. It’s not like you start a business and all of a sudden you start making money without working on it constantly.

2. Royalties

The same goes for royalties on content you produced. After all, for this you need to put in a lot of work up front in the hopes that you created something people are willing to pay for.

3. Real estate

I wouldn’t consider real estate investing fully passive either and it usually requires a lot of capital up front, with you taking on a lot more risk using leverage via a bank loan. We’ll discuss it in more detail later in the post.

4. REITs

REITs (Real Estate Investment Trusts) are usually publicly listed companies you can invest in, providing a way for individual investors to earn regular income from real estate, without needing to buy and manage the properties yourself. This could indeed be an interesting option, I’ll get to some ways to do this as a European investor later on.

5. Cash Deposits, Bonds and Money Market Funds

He also mentions cash deposits, money market funds and bonds, all three of which can indeed generate passive income. Just keep in mind that these won’t help you beat inflation long-term, in case that’s your goal.

6. P2P Lending

Andrei is the only one of the four YouTubers who also listed P2P lending as a riskier option at the start. Yet, since interest rates on P2P loans in the US are quite a bit lower compared to what you can get in the sector in Europe, they’re most likely not worth the risk for US investors.

7. Dividend stocks

Once again, dividend stocks are indeed a feasible option to generate passive income. I like that he mentioned that dividends are not 100% guaranteed, they can go up or down and that he was honest about the fact that his returns with dividend stocks have so far been lower than simply investing in a passive low-cost index or ETF.

I consider Andrei Jikh to be one of the better finance influencers and in my opinion this video contained a lot more useful advice compared to 99% of the passive income clickbait-videos out there.

Passive Income: How to invest $100 in 2023 by Graham Stephan

Last but not least, let’s see what Graham Stephan, who was actually one of my role models when I started my YouTube channel over years ago had to say in his latest video on the topic.

You either have to invest your money or your time

He clearly mentions that there are two ways to generate passive income: You either invest your money or you invest your time by starting a business for example. But let’s be honest, when someone invests their time to earn money that’s just called working, not making passive income.

Two actually passive options he mentions

The only two options that are really passive from his video are once again dividend paying stocks as well as index funds. I appreciate him mentioning that not all dividend stocks are worth buying, even if they’re paying you a high dividend yield, if their stock price performance ends up being below the market average.

After all, dividends are not the only thing that matters, you need to look at the total return (dividends and capital gains) from your investments.

A Side Hustle is Not Passive

After watching these four videos, I have to say Graham and Andrei’s were the most useful and true to their title.

Meanwhile, instead of putting passive income in the title, Mark Tilbury and Ali Abdaal should have probably titled their videos “Second Job Ideas – How I Make x number of $ per Week (from my Work)” instead, but that would have generated a lot fewer clicks!

Actually Passive Income Options for European Investors

So let’s recap, here are the only few worthwhile options that are actually passive, my take on them and how I would implement them myself as a European investor, since I myself am based in Austria.

Just please keep in mind that none of this is of course investment advice, I’m just sharing my opinion based on my personal experience as an investor.

Option 1: Dividend Stocks and High Dividend Yield ETFs

Let’s begin with what I would consider the most passive out of all the options today: Dividend paying stocks.

But, since selecting the right stocks manually and monitoring them on a regular basis is far from passive and more likely to lead to less than optimal results statistically, you should probably select an ETF instead.

There’s just one thing I would keep in mind: The dividend yield shouldn’t be the only thing that you focus on, if your goal is to build wealth long term, not just cash flow in the short-run.

For example, the Distributing version of my favorite ETF, the Vanguard FTSE-All World, containing over 3.600 stocks from all over the world, has a dividend yield of only about 2% per year. But, looking at its yearly returns or its total return of over 50% over the past 5 years, it should be pretty clear that dividends are only part of the investment returns you can achieve with stocks or in this case ETFs.

When looking at ETFs targeted towards income investors, you should therefore always look at their total performance (so dividends and capital gains) combined. You can do that very easily on JustETF.

Let’s compare a few of the most popular global high yield ETFs with the Vanguard FTSE All-World to show you what I mean:

• iShares Stoxx Global Select Dividend 100
• SPDR S&P Global Dividend Aristocrats
• Vanguard FTSE All-World High Dividend Yield Distributing

Combined these three have several billion euros in assets under management, because they pay out more in dividends, for example the Stoxx Global Select Dividend 100 currently has a dividend yield of 6%. Sounds pretty good right?

Well, what is the point when it ends up with less than half the performance over the last 10 years, including dividends, compared to a simple low-cost FTSE All-World ETF? It’s a similar story with the SPDR S&P 500 Global Dividend Aristocrats and the Vanguard FTSE All-World High Dividend Yield ETF.

Right now, there is only one well-diversified global dividend focused ETF I would consider:

The Fidelity Global Quality Income UCITS ETF (FGEQ). It currently has a dividend yield of 2,84% per year and even managed to outperform the Vanguard FTSE All-World over the past 6 years:

Option 2: REITs vs. Physical Real Estate Investments

Speaking of dividend paying stocks, this brings me to option number 2, REITs, which is short for real estate investment trusts. These are usually publicly listed companies you can invest in, enabling you to earn income from real estate, without needing to buy and manage the properties yourself.

Purchasing an apartment or house using leverage via a bank loan, dealing with all the work and responsibilities that come with home ownership and then renting it out in the hopes of generating positive cashflow after all expenses incl. loan repayments and interest is not a passive investment in my opinion.

It’s more of a side hustle, which obviously gets easier the more rental units and experience you have and if you happen to get lucky with your tenants. But, it will still take up some of your time on a regular basis.

Meanwhile, investing into REITs could indeed be an interesting option if you’re an income-focused investor, as it’s a way to invest into real estate that’s actually entirely passive. Once again I would pick a well diversified ETF containing a large number of REITs and real estate companies from all over the world instead of trying to pick single stocks.

In my opinion the three best ETFs for this purpose are:

• HSBC FTSE EPRA NAREIT Developed UCITS ETF (HPRD)
• VanEck Global Real Estate UCITS ETF (TRET)
• iShares Developed Markets Property Yield UCITS ETF (IWDP or IQQ6)

They currently have dividend yields ranging from 2,5-4% per year.

If we do a backtest on Curvo, we can see that the Vaneck Global Real Estate ETF performed the best since 2011, but the other two are not far behind. Here we can also see that just as the global real estate sector recovered from Covid, the current high interest rate environment by central banks pushed prices back down:

On the other hand, this could represent a good buying opportunity if you believe central banks are going to lower interest rates over the coming months and years, as they’re hopefully getting inflation under control.

Option 3: Peer-to-Peer Lending

This brings me to the third option that’s able to really generate passive income, P2P lending. With interest rates ranging from 10-15% per year on the most popular European platforms, this asset class can generate a lot of cash flow quickly.

That being said, it’s obviously not risk-free either, don’t let anyone tell you otherwise. That is why I limit P2P to 10-15% of my own investment portfolio, less than a 5th of what I have in passive ETFs for comparison.

Also, proper diversification over platforms and lending companies is key. The saying never put all your eggs in one basket is true for this sector as well.

You should check out this recent post of mine to find out more about how P2P lending works, the risks associated with it as well as my favorite platforms right now:

What You Really Need to Generate Passive Income

So, you might have noticed that all the truly passive options to generate income might not require much of your time, unlike all the side hustles in the clickbaity passive income videos online, but they do require your capital.

The good news is, while you’ll probably start small, for example 3% dividends per year on an investment of 10.000€ is “only” 300€ per year or 25€/month, you’ll be able to increase the income your receive from these over time by saving and investing part of your salary from your existing job and reinvesting dividends you receive in case you’re not planning on spending them.

And if you choose well-diversified ETFs for example, chances are you’ll end up with much better total returns than just a 3% dividend yield long-term. Personally, I’m expecting an average of about 7% p.a. from my investments in global stock market ETFs over the long run, with plenty of ups and downs in between.

Option 4: Interest On Savings Accounts

But wait, there are two more options I didn’t mention in the previous section since they’re highly unlikely to beat inflation over a prolonged period of time and because they might only be interesting over the next year or so, after the recent rise in interest rates.

The first one is a simple cash deposit aka. savings account secured by a bank deposit guarantee of 100.000€, like the 2% interest per year I’ve been getting on my cash reserves using the broker Trade Republic since January, paid out at the start of each month.

If you dig around, you might be able to get half a percent more in interest somewhere else. But, don’t forget that being able to invest the money right away, for example if the stock market suddenly drops a few percent, might be worth giving up on a slightly higher interest rate on your cash, when you consider the opportunity cost of you needing to transfer money to a broker beforehand.

At least that’s how I feel about it.

Speaking of that, after recording the video, Scalable Capital launched an offer paying 4% p.a. on € deposits secured by a German 100.000€ bank deposit guarantee, which might be worth looking at in case you’re based in Austria, Germany, Netherlands, Italy, Spain or France.

Option 5: Bonds

Lastly, bonds can be another effective tool to earn interest with very low risk, as long as you stick to the highest rated euro denominated government bonds and short durations of less than one year.

That way you limit the risk of your bond ETF crashing almost 19% in value due to rising interest rates, which is exactly what happened last year to the largest Euro government bond with more than 4 billion € in assets under management, the iShares Core Euro Government Bond:

Bonds are something that’s very difficult to successfully cover via ETFs and I have to admit I have zero experience with them, because we’ve had negative interest rates for so long in Europe. It’s something I’m planning to look into more though, so stay tuned for more content on the topic.

Option 6: xTrackers EUR Overnight Rate Swap

Now, there is still one ETF option you could look into if you wanted.

I’m talking about the Xtrackers EUR Overnight Rate Swap UCITS ETF (XEON), which aims to track the performance of a deposit earning interest at the current Euro short term rate, which is sitting at 3,65% per year right now.

While it helps you eliminate the duration risk you have with bond ETFs, it does expose you to some counterparty risk due to it being a synthetic swap based ETF, so just keep that in mind.

You can find it using the ticker symbol XEON on Interactive Brokers and other low-cost brokers in Europe.

Alright, there you have it! Now I want to hear from you guys though:

What is your take on all the passive income advice you see online?

Do you agree or disagree with what I shared?