Investing in Music Royalties: Aggressive Beats, Passive Income

"Sweet Caroline...ba ba ba!" If you've spent any time in bars with a jukebox, or at karaoke nights, you've probably heard that familiar refrain more times than you'd like. Did you ever stop to consider that the artists and songwriters behind Neil Diamond's most overplayed song are getting a payout every time you hear it? Cha-ching.

In fact, one music executive estimates that Diamond earns $300,000 to $500,000 per year on that song alone. Want to get in on that sweet, passive income action?

Investing in music royalties is more accessible than ever, and it allows anyone—not just the musically-inclined—to get a piece of the royalty pie. Here are the basics and how to get started.

Even if you've never written a song in your life, you can invest in song royalties. There are various platforms now for buying and selling music rights, so artists can sell off a portion of their song or album rights and investors can buy those rights in order to collect royalties. In addition to investing in song royalties, some of these platforms also let you invest in other types of music royalties as well as book publishing, television, and movie royalties.

When you invest in song royalties, you're setting up a passive income stream. Every time someone plays the song—whether it's a grocery store playing it in the aisles or a person streaming it through Spotify—you earn a small payout called a royalty. Depending on the music you invest in, you may earn royalties sporadically or you may earn them on a near-daily basis.

Unfortunately, investing in music royalties isn't as simple as choosing your favorite songs—or even being able to predict when a song will skyrocket in popularity. If you want to invest in music royalties that will continue to pay out for years to come, you need to consider a few different factors. Investing platform Royalty Exchange, which lets you buy royalties to popular music, used their historical song sales to identify some important things to consider when investing in music royalties.

Long-term potential

A song might have the potential to top the charts, but if it falls off the charts just as quickly, it's not necessarily the best investment. You'll get a brief boost and then fall off in royalties rather than an ongoing, long-term stream of passive income. Instead of looking for the next big hit, you want to look for music that already has proven longevity. If it's been earning steady royalties for a decade or longer, you can confidently invest knowing it will probably continue to earn royalties for years to come.

Hard numbers over easy listening

Royalty Exchange actually found that investors who examine the financials before investing in music royalties without actually listening to the songs or reading up on the artists actually earn above average returns. In other words, your personal musical preferences will have little to do with picking the best investment when it comes to music royalties. Instead, you should be examining the listing details—when you invest through Royalty Exchange, you can see everything from historical earnings to price tracking to the included rights.

Type of royalty

You want to know the source of the royalties you're buying and what kind of event triggers a payout. Are you buying royalties that pay out when a song is performed, when it's played on the radio, or when it's streamed through a streaming service like Spotify? Radio and physical copies of music are on their way out the door, while streaming is likely to stick around for a good while. If you're buying streaming royalties, the likelihood of your investment being sustainable over the long-term is higher than if you're buying radio royalties.

Music royalties can be a great way to futher diversify your portfolio. As an asset class, they can provide a steady stream of passive income that's often higher than what you'd get elsewhere. Interest rates are low right now, so even the best savings accounts are only paying out 0.20% to 0.40%. When it comes to investing, you can buy dividend stocks, but the average dividend yield on the S&P 500 is only 1.8%. For comparison, the average annualized returns earned from Royalty Exchange are above 12%.

In fact, music royalties are considered an uncorrelated asset, which means that your returns don't follow the same pattern as the stock market. This makes sense, given that (with the rare exception) music isn't usually impacted by economic crises—people continue to stream music and listen to the radio when times are hard. In fact, even during the COVID-19 pandemic when live music performances disappeared entirely, music royalties held up fairly well compared to most other industries.

There are a few music royalty funds that anyone can invest in, like Hipgnosis Songs Fund, which is a publicly-traded music investment company based in the UK. Alternatively, you can buy music rights directly through platforms like Royalty Exchange. While this might require a little more due diligence on your part, it means you get to collect royalties directly. 

While it's not wise to pull out of the stock market and put all your money into music royalties, adding them to your portfolio can help you optimize your investments and earn passive income.