Rich Habits Podcast - 34: Generating REAL Passive Income

Episode Date: October 16, 2023

In this episode of the Rich Habits Podcast, Robert Croak and Austin Hankwitz share their three favorite ways to generate REAL passive income. No, not the passive income you hear about on TikTok through vending machines or laundromats -- we're talking about REAL "make money in your sleep" passive income. By investing into music royalties, dividend-paying ETFs, and selling covered call option contracts you can begin to inch closer toward thousands per month in REAL passive income. Learn more about covered calls, click here!Learn more about Shrek music royalties, click here!---Be sure to check out Public's new ⁠⁠⁠High Yield Cash Account paying 5.1% APY.⁠⁠⁠ This is higher than anything else on the market and is FDIC insured up to $5M. ---Earn 5.1% APY using a Public HYCA, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Opt-in and share your email, ⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠Learn more about our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠4-module video course!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Download our FREE Budget Template, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠click here!⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Robert: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/RobertJCroak⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠To learn more about Austin: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://stan.store/austinhankwitz⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Contact: [e-mail] ---Hankwitz Group LLC has an existing business relationship with NEOS Investment Management LLC. The opinions expressed are those of the author, and the author owns several NEOS ETFs.

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From binge all episodes exclusively on Paramount Plus. Hey everyone and welcome back to the Rich Habits podcast, a top three business podcast on Spotify. My name is Austin Hankwitz and I'm joined by my co-host Robert Croke. Robert is a seasoned entrepreneur in his 50s with more than 200 million in company exits under his belt and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and actively advise some of the most well-known fintech companies around the world. As the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset.

However, we try and bring you two unique perspectives. One from an industry veteran, which is Robert and the other myself, someone who's still in the process of building wealth and figuring it all out. So, Robert, what are we going to be talking about in today's episode? In today's episode of the Rich Habits podcast, we'll be breaking down our three favorite ways to generate real passive income. Yes, real passive income. We see people on TikTok, Instagram, and YouTube every single day sharing passive income tips and tricks, but half the time you need tens of thousands of dollars

and it's not even passive. This episode is going to share not only passive income ideas that are truly passive, but in some instances will generate well over 10% annual returns on your invested capital. This is passive income, the easy way. Let's jump into it. So kicking things off here, Robert, with music royalties. They're exactly what you think, right? By owning equity in a catalog of in-demand music, you're able to generate passive income as the royalties on that music trickle in over time.

A good example of this is actually the Shrek music catalog, like the Big Green Ogre Shrek, right? Public.com actually recently announced a large equity stake in their billion dollar franchise and is selling shares of the Shrek music record. royalties for only $10 a piece right now. So super affordable. I already went on and bought my own. Now, by owning shares in the music, you can expect passive income paid to you, the owner, in the form of dividends. For example, the Shrek music royalties tends to pay out around a 9% annualized dividend. And I think even two or three quarters ago, it was more. It was like 11 or 12%. It is unbelievable to me to think that 20 years ago, the only people who were best, benefiting from music catalogs where like Capital Records or Sony Music or Disney or these big, big,

big conglomerates. When in actuality, today, it's so democratized, right? It's so easy for the average investor to diversify their portfolio with income in mind. That's why we love modern technology in the blockchain, because with all of these new platforms and fractional shares, the everyday person can get in on these great investment strategies. This is such a great way for everyday people to diversify their portfolios with income in mind. Too many people just overthink generating passive income. They go buy an apartment building or storage units or vending machines or a gas station. Trust me, I love all of those investment strategies, but none of those are truly passive like what we're speaking about today. So again, I've already requested and purchased my shares

of the Shrek music catalog. I will leave a link in the description below for anyone listening right now that wants to read their investor presentation or, you know, review the financials and learn more about the opportunity. It's just, it's bonkers. It's the coolest thing I've ever seen. So, Robert, we now know number one here as music royalties, 9, 10, 11, 12% annualized returns on that invested capital. What is our second passive income idea? Number two, dividend paying ETFs. This one is one of my favorites and often overlooked. It takes all of five minutes to partake in the success of this one by owning an ETF full of dividend-paying stocks, you're able to generate passive income from those stocks. Some of my favorite

dividend-paying ETFs include SCHD and NOBL. These two are great but very different. S-C-H-D is a dividend growth ETF. By that I mean they hike their annual dividend by 7 to 10 percent annually, whereas N-O-B-L is different. They're not focused on growth, but instead consistency. Beyond those ETFs, my favorite high-paying passive income dividend ETF that I believe everyone listening should own is SPYI. This ETF leverages a covered call option contract strategy that generates over 12% annual distributions, allowing you to collect monthly passive income. I really love this

strategy and Austin, I'd like to you to break it down a little bit further. Yeah, so I mean, I'm a shareholder, right, of both S-C-H-D and S-PY. So good callouts there, Robert, right? S-C-H-D, just so everyone is aware, it yields maybe three and a half, four percent annual dividend yield, you know, on their ETF. And to Robert's point, they're very much focused on growth, right? So how does that grow on an annualized basis by that 7% and 10%?

Which is cool. Some people want to see their income paid to them growing every single year. Where other people, on the other hand, like myself and Robert, we want to just get that money up front, baby. Let me see that SPYI. So SPYI is special because it's both a very high yield at that 12% annual distribution, but it's also much more tax efficient than an SCHD or an NOBL. They leverage something called Section 1256 Index Option Contracts,

which allows you the investor to pay much less in taxes when Uncle Sam comes knocking in April. So in my opinion, it is one of the best ways to diversify your portfolio with income in mind. And if you're one of these investors, obviously listening because you want to generate passive income, true passive, like just sit there income. You don't have to go work a gas station or work a laundromat or go work a vending machine. Like invest capital and then get income from that. SPYI is likely the best way to go do that. It is just, it's incredibly easy, incredibly tax efficient. Their team is incredible over there. And, you know, it is something that myself and Robert both do ourselves. Love it. So, Austin, why don't you take us into number three covered calls? Yeah,

So this one's a little bit more complicated, but I know our audience is definitely up for the challenge. Covered call option contracts. It's intimidating. You may not have ever heard of them, and that's totally okay. There's a ton of resources online to learn more. But think about it like this. Let's say that you owned 100 shares of SOFI stock, right? The company who does the student loan refinancing and, you know, it's SOFI.

We've heard of SOFI. And let's say you paid $8.50 per share for that stock. So $850 total leaving your checking account. Now, you can go inside your online broker. That might be Robin Hood, Fidelity, or Charles Schwab. There's a bunch of them. And sell something called a covered call contract. This contract allows you to say, hey, I bought these shares for $8.50 a piece,

and I'll let someone else out there buy them from me for $9.50 a piece, giving me a $1 per share profit, so $100 in profit total, before a specific date. And by committing to that $9.50 share price, you'll be able to also generate something called premium on your contract, which is that passive income we've been talking about, right? So if you do this correctly, you'll be able to both make money on the capital gains that 850 to 950, as well as generate passive income, the premium, by writing, the contracts. This is very intimidating to hear, and it's not anything we learned in school, learned in college, our parents don't know. Like, this is something you have to learn on your own,

but I promise you, if you experiment, you take the time, you carve out $800, 900 to really try and learn this stuff with smaller companies like SOFI, you'll be able to generate 6 to 7% in cash on cash returns with that premium against your invested capital immediately. And if the market moves in the right direction for you, up to 13 or 14 percent and only a four, five, or six week time period. So this is true passive income with massive upside potential. You just have to understand how to approach it and how to have a long-term investing horizon on the underlying stock that you are trading. What an amazing breakdown. Austin and I have been selling covered calls on Tesla for the last few weeks, and we've been able to generate over $2,400 in

premium income on our stocks in only a month. This covered call stuff can be confusing. So we've linked out in the show notes below, a deep dive explanation by Austin from his newsletter. So please check it out. This is a great strategy. We love it. We're implementing it more into our daily investing strategies and think all of you should try it as well. Really? Seriously, go take the time. Go type in covered call on YouTube and go listen to someone talk about it. or go type it in on Google and go to an investipedia page, right? There are a ton of resources out there, and it's really scary and intimidating, but you just have to start.

That's all it is. And once you start and get comfortable with it, you can do what Robert and I do and start making thousands of dollars a month writing covered calls on the stocks we already own. It's pretty incredible. Yeah, Austin, maybe we should consider doing a live video on our next purchase that we talked about and really show people the walkthrough of it all. that could be really fun for our listeners to have that asset to be able to relate to and go back to

as they're learning this strategy. That's a really good idea. I think what's really intimidating about covered calls is to be able to do them and generate the 6, 10, 14% returns, you need to own 100 shares of a stock. And for a lot of people to buy 100 shares of Tesla like us, for example, right, that cost us $26,000. It's a lot of money. And we don't expect people to have that just laying around. Now, so far, which is the name of the stock that I used in the example here, that's only $8.50 and 50 cents a share. So about $850, maybe $900, depending on what the market's doing that day, that's a lot more approachable. It's a lot more reasonable to test with and try to understand a true passive income generating strategy with. So to your point, Robert, I love that.

We should definitely host like a webinar or a workshop or something, sharing how we've been able to generate income with covered calls and walk people through how to do it themselves. I love it. We should definitely do that. So you heard it here on this episode. We're going to put this together to help everyone because as we expand on our teachings and the different ways to make diversified passive income, we want to make sure to share that information with you so it's actionable for all of our listeners. So we'll get on that right away. Now let's jump in to everyone's favorite segment of the podcast, our question and answer segment. Kevin is our first question.

Kevin asks, I'm 17 years old and I have $20,000 in my savings. I turned 18 in a few months and I plan to open a Roth IRA. What should I do with all of this money so I'm able to retire wealthy? Robert, you want to kick us off? Yes, Kevin, I love this. And the fact that you're 17 years old and you're plotting out a plan is amazing. You are so far ahead of the curve. It's unreal.

So what I would do at 17 years old with that kind of money, I would do the Roth IRA first and foremost. I would then invest in a basket of index funds. We like V-O-O-Q-Q-Q, A-I-Q, some of the other ones we mentioned in this episode. So I would start there. Secondly, I would probably open a public.com account, and I would put some money in there in treasury bills. And then also some crypto like Bitcoin. I would start there and get yourself into the crypto market.

And then third, and what I like a lot is I would open an Acorn's account. Get started there with your roundups and maybe $10 a week, $20 a week. and then maybe put a small portion of this into Fundrise in the Innovation Fund so you can invest in pre-IPO companies, just like the big boys and girls do, and have a very well-diversified portfolio right at your 18th birthday. That is a great walkthrough, and I'm over here kind of playing in real time, Robert, with one of these retirement calculators from calculator.comnet. And essentially what I've done for you, Kevin, just to put all this in perspective, right?

If you took your $20,000 of savings. Now, I'm not saying you take all this money, to Robert's point, put some in T-bills, have some savings, put some in more advantageous investment ideas like the Fundrise Innovation Fund, things like that. So diversify for sure. But if you did decide to take all $20,000 of this, park it into the S&P 500 via your Roth IRA and public.com and things like that, you could expect to have $850,000 by the time you were $60,000. assuming an 8% annual return, which includes that inflation of about 2 to 2.5%.

Assuming the S&P 500 continues to do what we know it does best. But like, oh my gosh, dude, you are 17 years old with such a bright future, right? This potential for $850,000. So to your question of what should I do with all this money to be able to retire wealthy, you invest it, right? Invest it into the S&P 500. Invest it into yourself. You invest it into the Fundrise Innovation Fund.

Maybe you get some real estate going in there. Maybe you can do a little bit of cryptocurrency, but invest the money. What you should not do is go out and buy a brand new car and go flex on your friends. What you should not do is say, oh, I'm going to go buy a Rolex. No, you don't want to do that either. What you should not do is go pay cash for college tuition, right, for your first year and say, oh, now we only have three years of student loans and not four. This money is massive for your future right now, assuming you're able to leverage compound interest

into your 30s, 40s, 50s and 60s. So if I were you, I'd follow the plan that Robert just laid out, right? Rock and roll with that Roth IRA, open up your public account, put 5K in there for your treasuries for your emergency fund, get a little bit of cryptocurrency if you'd like, get a little bit of exposure to the Fundrise Innovation Fund and keep at it. You've already proven to yourself that you know how to make money. You already proven to yourself, you know how to save money. Now it's time to prove to yourself and your future self that you know how to invest the money

properly. To everyone listening right now, thank you, Austin, for that amazing takeaway. please remember one very important statement of all the things we talk about. It's not about timing the market. It's about time in the market. So with you starting so early at 18 years old, if you do this right, you will be setting yourself up for wealth and financial freedom from day one. Congratulations, Kevin. Our next question comes from Amy. Amy says I got a few quick questions, so let's do it, Amy. First one, my 529 plan doesn't allow me to buy ETFs. which account do you recommend instead?

So the 529 account that I opened up for my nephew was with Vanguard, and I can buy Vanguard ETFs like V-O-O-V-G-T-V-I-T-I-I-I-I-X, right? All those nice, big, beautiful index funds that we love. So Vanguard might be the solution for you. So her next question is my 401K plan doesn't have V-O-O, it only has SPI-A-X. Should I buy that instead? So, Robert, I don't think we ever talked about this, but it's actually a really good call out by Amy here.

You know, a lot of these 401Ks get approached by these mutual fund companies and these large financial institutions saying, hey, listen, we've built this incredible product for you to invest your money into and you should tell all of your employees to invest your money into this and it's just going to continue to go up until the right and they'll be fine. Now, don't get me wrong, SPIAX is an incredible fund. It is, it tracks the S&P 500. It's great.

It does what VO does. Now, here's the big. difference that you probably don't know about. SPIAX has an expense ratio of 54 basis points, so about half a percent, which means every year, half a percent of your assets get swooped up and paid to the mutual fund company of Invesco because you're using their fund. Vanguard's V-O-O, which is the exact same, you know, sort of strategy here of investing into the S&P 500, exact same returns, everything's the same. They charge three bases. So you're paying 18 times more of your money to this other company because they convinced your 401k provider to just funnel all the money into SPIAX.

Now I'm not mad at them. It's a business. I understand it, go make your money. But like, it's just so frustrating sometimes for Robert and us to see that people can just go invest in V-O-O and only pay three basis points, but they can't because their employer wouldn't sign this agreement with Invesco saying, sure, we'll just tell all of our employees and make it so they have to invest into your funds. So invest goes over here making all this money now. It's just, it's so frustrating to see. But long story short, Amy, the answer is yes. It's a great fund. If that's all you have, then yes, invest into SPIAX. It is the S&P 500. You'll be just fine. It's just frustrating for Robert and I to see that you're going to be paying 18 times more in expenses on an annualized basis

than you would if you had the opportunity to invest into a Vanguard product. But that's, that's your employer's decision. Square knows that in hospitality, efficiency is everything. That's why their system lets you take payments. Track sales, handle inventory, manage staff, send invoices, and keep up with finances all in one place. Fly through orders with zero mistakes. Get the data you need and keep everything working together.

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The refined Tiguan, you deserve more style. Visit vw.ca to learn more. SuvW, German engineered for all. I just want to jump out of my skin on this one because we talk about this so much. And a high percentage of people out there that reach out to Austin and I for guidance. simply don't know what they're paying in fees, they don't know what they're investing in, and they don't really keep track of it all.

And when I see SPIAX charging 18 times the amount of what simply V-O-O charges an expense ratio, it drives me crazy because at the end of the day, it's not what you make, it's what you keep. And I want vehicles that pay me the most and give me the most return on my money. And everyone needs to make money in this, of course. But it's just ridiculous that V-O-O-E-O-E-Rexchange.

is such a better value. Couldn't have said it better myself. Our last question comes from Cade. Cade says, Hey, Austin, you actually mentioned that you opened your LLC with Buffalo registered agents inside of Wyoming. We are in Texas. We used a company called Dula and it cost us about $600. We're not sure if we should stick with Dula going forward or if we should try Buffalo registered agents in the future. Now before I answer that, Robert, can you kind of break down exactly what all this lingo means and why it's important. Yes, I would love to. This is one of my favorite topics, and that is LLC and business formation, because most people out there don't have the proper guidance to check all their boxes and make sure they do it right. And the key here of what you've done Kade correctly with Dula is

having that registered agent. So many people skip this step, and it's so important, and here's why. Having a registered agent is so important to give you further anonymity and isolation from prying eyes. So for instance, let's say you get into a lawsuit and a lawyer from the opposing people start searching what LLCs you own personally, having that step of the registered agent between you and the LLC gives you that additional layer so they can't find you and what you own. So many people skip this step and a registered agent can simply be your lawyer. It could be a cousin with a different name. it could be your assistant, someone that just accepts the mail for your LLC, but what that does is it keeps your personal name off of all the registered websites for the LLCs with the state

and local governments so people cannot find you. I appreciate the walk through, Robert. It's something I'm so learning about, and I think something that, especially as you are really building yourself and your wealth building journey, maybe you have a business of some sorts, you're selling online, maybe it's a product or a service. It's a really good idea to spend that extra couple hundred dollars if it's with Dula, which is I was going to say I like Dula a lot. It's a great platform. But if that's with Dula or Buffalo Registered Agents, it doesn't matter who you're doing this with as long as you are doing it in a way that is responsible and you're thinking forward as to why anonymity is so important. So a really good call out there, Kade, couldn't agree more.

Dula's great. Buffalo registered agents is great. Doesn't really matter. It's call comes down to price at the end of the day. But just thinking about that. this and doing this is what's important. So good stuff. Love it. Yes, that was a great question. And just like that, another episode of the Rich Habits podcast is in the books. This episode, again, we talked about true passive income, not passive income that your Uncle Bill told you you can get with vending machines, not passive income that your aunt Kim told you can get with laundromats. I'm talking about the passive income where you wake up, you don't think about it, and the money still hits your account regardless. We talked about music royalties. You can do that on

Public.com with a new Shrek franchise music royalty offering at $10 a share. We talked about dividend-paying ETFs like S-C-H-D, N-O-B-L, but our favorite, more importantly, SPYI with that 12% annual distribution yield and extra tax efficiency. And finally, we talked about the covered call option strategy, something that's intimidating and challenging, but once you get the hang of this, you'll be able to start generating hundreds, if not thousands of dollars every single month in predictable passive income by also owning stocks that you love. Again, I want to thank each and every one of you for listening with us week in and week

out every Monday and Thursday for the Rich Habits podcast. So today we talked about all of these great passive income strategies, and we're going to put a webinar together for all of you listening to be able to spell that out, make it easy, take all the scare out of it, and really make it simple for everyone to follow along. And we appreciate you each and every week for joining us on the Rich Habits podcast. Don't forget to give us a positive review on Spotify or Apple Podcasts wherever you listen. And don't forget to share this episode with a friend. We want everyone to be leveraging their own passive income strategies so they can retire wealthy and comfortable.

Thanks, everyone, and have a great start to your week.