Can You, Indeed, Build a Decent Passive Income with Stocks?

Stock certificate of the Baltimore and Ohio Railroad Company, 1903. Collection of JGHowes)


  • The numbers show historical stock market returns are high, ideal to reach a passive income.
  • By researches about long-term performance, you could double your money in ten years on average.
  • All long-term data shows a positive real stock market return. That means, the purchasing power of your money increases.
  • But passive income in the stock market is incalculable in the shorter term, due to the enormous price fluctuations.

Passive Income with Stocks – Is It a Myth?

Don’t worry, this isn’t about a “get-rich-quick-scheme” or other shady investments. Rather, the myth that risky equities can provide higher returns over the long term than low-risk investments. Is this true? Are stocks, indeed, outperforming? Can you build passive income with stocks? (Stocks are also called shares.)

Or is this only a way to lure people into expensive or bad investments? Financial service providers, like banks and wealth managers, are often citing seductive historic data. They try to convince people to invest in high-risk assets. Many sources are claiming the return of the stock market is much higher in the long term than the return of the bond market. Or, the interests of bank accounts, or inflation. For example:

The Federal Reserve Bank of St. Louis has measured the returns of stocks, Treasury bills, and 10-year Treasury bonds. (…) Stocks averaged an annual return of 11.50% in the period from 1928-2013, while T-bills and T-bonds averaged 3.57% and 5.21%, respectively. (…) The S&P 500 clearly posts higher annualized returns, but the extreme fluctuation during market swings can make it a turbulent investment. (Source: The Balance. T-bills and T-bonds are interest-bearing debt issued by the federal government of the USA.)

Twenty Times More Money to Spend

The quote didn’t mention inflation. But let’s dig deeper into the data. The Dow Jones Industrial Average Index is a very old tool. As on the first chart, inflation-adjusted, it surged to 28,256 points from approximately 1419 points in 105 years. That means, its value increased 19.9-fold, which is 2.89 percent p. a. and in real terms.

Chart 1: 105 years of the Dow Jones Industrial Average, monthly, inflation-adjusted
Chart 1: 105 years of the Dow Jones Industrial Average, monthly, inflation-adjusted (“using the headline CPI”). (Source: Macrotrends)

If somebody invested 100 dollars in February 2015, today, his descendants have almost twenty times as much money, $2,000. Important is that inflation is already discounted here. So we are talking about positive returns over inflation. (That is what “inflation-adjusted” or “real return” means.) The happy heirs can buy twenty times as many products or services than with the original $100. (If you get tired of so much data, you can still look at the graphs and read the conclusion at the end.)

Passive Income in 105 Years?

I found another historical dataset of the S&P 500 index from 1915. (Source) The value of the index was calculated as 7.52 index points on February 20, 1915. Compared with 3,386 points on February 20, 2020, that means a 450-fold increase. (That index didn’t exist at that time. So these are values estimated by scientific methods.) But we must adjust it with inflation. By the index of USInflationcalculator, the consumer prices increased from 10.1 to 257.97 in 105 years – 25.5-fold.

(Photo: Burlington and Missouri River Railroad Company, 1872.
Photo: Burlington and Missouri River Railroad Company, 1872. (Wikimedia,

That means the stock market index increased 5.99 percent, while the inflation reached 3.13 percent p. a. (Per annum, or per year, on a yearly basis.) Accordingly, the real return of the stocks in the index reaches 2.86 percent. It is very like the other 2,89 percent we calculated from the chart of the Dow Jones Industrial Index above.

Old Economy, Young Economy

That sounds good but won’t make you happy as you can’t live for 105 years. But some indices are obsolete in some senses. First, the Dow Jones Industrial contains only industrial companies. In the modern economy, services, internet businesses, healthcare, high-tech branches are very important. These are growing at an accelerated speed.

Chart 2: US and international indices. (ICIC: Nasdaq Composite, US. DJI: Dow Jones Industrial, US. SPX: S&P 500, US. DEU30: DAX, Germany. UKX: FTSE 100, United Kingdom. NI225: Nikkei 225, Japan.
Chart 2: US and international indices. (ICIC: Nasdaq Composite, US. DJI: Dow Jones Industrial, US. SPX: S&P 500, US. DEU30: DAX, Germany. UKX: FTSE 100, United Kingdom. NI225: Nikkei 225, Japan. (Source:

First, I expected the S&P 500 index to perform much better than the industry average. Because it contains more branches, also modern ones. That’s not what happened. But that does not mean that there weren’t better stock market returns in recent decades. Look at chart 2. The Nasdaq Composite index of the technology sector over-performed the traditional industries in the last 30 years.

The bad news is, some international indexes underperformed the stock markets of the USA. (United Kingdom, Germany, Japan.) At least, that was the case in the last 30 years. (See chart 2.)

Passive Stock Income in “Irrational Exuberance”

“Irrational Exuberance” is a famous book of Robert Shiller, economist, Nobel Laureate in 2013. In the 3rd edition of his book, he studied stock market and bond market returns from January 1871 through 2014. The book is a little scary for stock investors. Because it is talking a lot about speculative bubbles, irrationally high prices, buyer’s madness. But the good news is: “historical average real return” of the stock market was 7.6 percent per year, to 2014 from 1871. This is very favorable for investors. It means that in less than ten years, the purchasing power of our money can double.

The bad news is here also: Shiller also calculated real stock market index moves for 10 countries. (Only from 1995.) But seven of them showed lower returns than the S&P 500 in the United States. Only Mexico and Brazil performed some better. It is questionable how much the US stock market performance data can be used in other markets.

Passive Income with Dividend Stocks?

No matter that someone is building passive income with stocks or speculating. The income of an investor has two main sources: the price increases and the dividends companies pay. Both are important in the long term. But another problem with the good old Dow Jones Industrial and also with the S&P 500 index is, they don’t contain the incomes from dividends. They measure only the price changes, and the dividend income gets lost.

But this is also good news for investors. That means for us that the real return of the stock market is higher than shown by these well-known indices. (Although other factors, like brokerage fees, taxes, can lower the return.) The return is much higher than the 2.9 percent we calculated for 105 years. That explains why the “historical average real return” of the stock market was much higher, 7.6 percent by Robert Shiller. Because he also included dividends.

Chart 3: S&P 500 Total Return and S&P 500 (Price Return) indices.
Chart 3: S&P 500 Total Return and S&P 500 (Price Return) indices.

Stock Indices and Dividends

Financial professionals saw this error and created so-called “Total return” (TR) type indices. These also contain the yielding effect of the dividends. The old-style, “price return” indicators don’t contain it. (Total return indexes are simulating that all cash payments, in the first line, the dividends, are reinvested into the index portfolio.) The S&P Total Return Index surged more than double the “normal” S&P (price index) in the last 32 years. (See chart 3 and also the table above.)

Stock Peaks and Rifts

You can realize that there are big differences between similar return statistics. Another reason is the “volatility”, the huge price fluctuations of stock prices. For example, some authors use data of 1928 as a starting point. After that, in 1928-1929 a huge stock market bubble, in 1929-1931 a big crash happened. I guess the beginning of 1928 is considered as some sort of a normal price level. But, in reality, there is no normal state of stock markets. So, you can’t measure stock market performance exactly. Valuations and returns are always relative.

Total Return and Price Return Indices, Returns

NameSymbolLast Value1 Year3 YearsCountry
FTSE 100UK1007,403.923.14%1.39%UK
FTSE 100 Total ReturnTRIUKX6,881.057.72%15.06%UK
DAX PriceGDAXIP6,039.0714.86%3.76%Germany
Dow 30DJI29,017.4711.48%39.68%US
DJ Industrial Average TRDJITR65,831.2614.12%49.77%US
NQ Composite TRXCMP11,314.7629.21%69.56%US
S&P 500US5003,344.1319.73%41.51%US
S&P 500 TRSPXTR6,860.5223.18%51.48%US
CAC 40FCHI6,029.7215.60%23.16%France
CAC 40 Gross TRPX1GR16,497.8820.12%36.42%France
WIG20 TRWIG20TR3,802.38-8.56%-0.18%Poland
Nikkei 225JP22523,386.749.15%20.68%Japan
Nikkei 225 Total ReturnN225TR38,067.3711.92%28.63%Japan
(Source: (February 21, 2020)

Let’s see a newer example. The S&P 500 index topped in October 2007 at 1580 points, approximately, then it fell to 662 in March 2009. The difference is huge, it lost about 58 percent. Today, at the end of February 2020, it is by 3123 points. That means a 98 percent surge from the top of 2007 (it doubled) and a 372 percent jump from the bottom of the so-called “Lehman-crash” (went 4.7-fold higher). (See chart 4.)

Chart 4: The S&P 500 index – The 2007 top and the Lehman-bottom
Chart 4: The S&P 500 index – The 2007 top and the Lehman-bottom (

Per year, that is only 5.7 percent from the top in 2007. Much more, 15.2 percent p. a. from the lows in 2009. But, inflation only reached 1.75 percent p. a. in this period. Buying in 2007 was a good idea – until today. If stock prices fall, that doesn’t mean all past investment returns will be zero or negative. In the long term, buying and holding expensive stocks can provide also a decent return, a nice passive income.

Conclusion: Yes, High Chances

“Primorskaya railroad” Russian Stock
“Primorskaya railroad” Russian Stock, Wikimedia Commons

Now, after so many data, tell me, can I build a decent passive income with stocks, or not? – you may ask. There is no magic formula or ultimate truth in the stock market. The past performance never guarantees future returns. But we can say that in the long term, the stock market provided a good passive income. A relatively high real income for investors. Nothing is sure, but there is a high chance it repeats in the next decades.

What happens if you buy stocks and the prices crash, again? (At the time of writing, everything fell on stock exchanges due to the coronavirus fears.) Prices halving, for example? A large fall – crash –, a longer crisis can ruin the returns of many years. But I think there are two very bad options: Selling low, on the bottom of the rift. The second mistake is if you have no shares at all in the long term. That is what history teaches us.

Your Active Bottom Line

Passive or any regular income can be achieved with relatively high and stable returns. Stock market prices and returns are very volatile, fluctuating. Dividends are more stable, at least if you build an adequate dividend stock portfolio. But even so incalculable. You can build a passive income portfolio – stock basket – gradually. Buying at lows, in corrections, for example. Buying even more in huge crashes. Although you better learn a lot about how – and so, passive income is no more completely passive. Stock investing is, in fact, a hard job. You will have a lot of work with it, at least at the beginning. (I wrote about this here: Is It A Myth? – The Genuine Truth About Passive Income)

More Important Readings for You About Your Money

(Historic photos: Wikimedia Commons. Cover: Stock certificate of the Baltimore and Ohio Railroad Company, 1903. Collection of JGHowes)


I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research, or consult your advisors before making any investment or financial or legal decisions.

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