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Passive income is essentially cash flow that you don’t have to actively work for. That might include income from stock investments, royalty payments, or rental income. It can be a great way to build financial stability, generate extra cash, and save for your old age.
Every source of passive income involves money, effort, and risk. How much of each depends on what route you take. For example, before you can generate royalty payments or commissions, you will need to put time and effort into creating a product that will pay them. As a result, a lot of people don’t see making music, writing a book, or creating online courses as viable passive income options.
The good news? If you’ve got money to invest, there are many other options available. Here are some passive income investment options that won’t take up too much time.
1. Dividend-paying stocks
Dividend investing can be a great source of passive income. Some companies use dividends to share their profits with their investors. The payout amount depends on the company. Dividends are usually paid quarterly, and the money will go directly into your brokerage account. Let’s say you own 50 shares of a company that pays a dividend of $0.50 per share. You would receive $25.
That effort we talked about above? There’s a lot of research and learning involved in picking your own stocks. And all stock market investments carry risk. One is that you buy a stock because it pays a high dividend, only to find that the stock price falls and you lose money. Make sure you understand how to research a company’s fundamentals, how to calculate dividend yield, and how to build a diversified portfolio.
Key takeaway: Dividend payments are great, but picking stocks that will appreciate in value is crucial if you want to build wealth. There are no guarantees, but the ideal scenario is to find promising stocks that also pay dividends.
2. REITs
Many people view renting out rooms or property as a good source of passive income. It can be. But in many cases, managing a property is a lot of work. If you’ve ever turned out in the middle of the night for a burst pipe or had the joy of dealing with difficult tenants, you will understand.
Real estate investment trusts (REITs) are another story. The trust owns, finances, and operates a portfolio of properties. That might be anything from offices to apartments, warehouses, and shopping malls. It’s a way to invest in property without getting involved in the management. Even better? You don’t need huge amounts of cash upfront.
REITs must pay at least 90% of their taxable income to shareholders, which translates into decent dividend payments. Many are listed on the stock exchange, so you can buy them from your stock broker.
As with dividend-paying stocks, you will need to do a lot of research and learn how to identify which ones have the best chance of success. It’s also important to understand real estate trends. For example, the pandemic hit hotel REITs hard, office culture is changing, and e-commerce is impacting shopping malls.
Key takeaway: REITs can play a part in a balanced dividend-focused portfolio and are an accessible way to get exposure to real estate. Pay attention to fees and carefully research each REIT before you buy. Look at its management team, balance sheet, industry trends, what properties it holds, and more.
3. Savings vehicles
Both of the options above carry risk. There will be years when stock market investments fall or real estate performs badly. Historically, the good years have outweighed the bad ones and produced decent average returns. But if you want a safer way to generate income, today’s high saving rates offer another possibility.
Right now, some of the best high-yield savings accounts and CDs are paying APYs of 5.00% or more. That means that $5,000 in a savings account could generate $250 in annual income. There’s not a lot of work involved, either. You need to pick the best account for you and be ready to change tactics when rates drop.
Key takeaway: Even today’s high savings rates aren’t as good as the historical average annual returns you’ll get on the stock market. However, they are higher than inflation. If you want an income stream that doesn’t involve hours of research and comes with FDIC insurance, a CD or savings account has merit.
4. Treasury bonds
Like savings accounts, Treasury bonds (T-bonds) will not generate the same returns as you might get from stocks. Buying a T-bond is like lending money to the government, which makes it a pretty safe investment. If you don’t want to hold the bond until maturity, you can sell it — though you might get the same price for it.
One big attraction of T-bonds is that they generate fixed, regular payments, so you know what you’re going to get. Even better, there are often tax breaks on the money you make. The downside is that bonds tend to pay lower returns than other, albeit riskier, investments.
Key takeaway: T-bonds can be a good way to diversify your portfolio and generate fixed income. Spend time understanding how bonds work, particularly interest rate risk. If rates rise, you may be stuck with a bond that’s paying a lower-than-market return.
Bottom line
If you’re willing to research and learn about how to analyze investments, there are a lot of ways to put your money to work for you. Whether it’s stocks, bonds, REITs, or — for a short time only — savings accounts, the right mix could help you build wealth and generate passive income.
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