It is possible to work less and earn more, and passive income can help you do that. To earn passive income, you typically need to make an upfront investment, in the form of money or time. But once all the parts are in place, little to no further work is usually required. That means you can sit back and relax while the money flows. It won’t necessarily be easy, but these passive income streams are some of the best ways to get started.
1. Dividend stocks
The concept of dividend stocks is simple: you invest in the shares of a company, and in turn that company rewards you with regular dividend payments. Dividends are typically paid on a quarterly basis, but some dividend stocks are paid monthly.
Dividend stocks typically pay a yield that may seem small, such as 3 percent. But the best dividend stocks increase their payouts every year, and the best of this group are called dividend aristocrats. It is generally better for investors to look for a company with a track record of rising dividends than to chase high yields, as a stock’s high yield may be a sign that investors believe returns are unsustainable. Other positive signs include a company increasing sales and generating consistently positive cash flow.
In addition, many dividend stocks receive preferential tax treatment.
2. Real estate
Real estate is a good investment because this industry will never disappear. Real estate can generate significant cash flow, and owners can also enjoy the significant tax shield against a property’s depreciation. Furthermore, real estate tends to have a weak correlation with the stock market, meaning it can help investors diversify their risk.
Of course, real estate is not always a passive investment. Some properties may require significant work, and some tenants require more attention than others. However, real estate can still be largely passive. One way to turn real estate into a more passive activity is to hire a property manager to oversee the day-to-day operations. Property managers charge a fee, but this allows you to earn returns without having to invest a lot of time.
You can invest in real estate in a variety of ways, depending on what is best suited to your time and talents.
3. Index funds
Another way to invest passively is with index funds. These investments are a mutual fund or an exchange-traded fund (ETF) that aims to mirror the performance of an index of stocks or bonds. For example, a stock index fund might track the performance of the S&P 500, a collection of about 500 of America’s top companies. Instead of buying shares of hundreds of companies, you can simply buy shares in an S&P 500 index fund.
Index funds provide passive income in the form of dividends and can generate significant wealth over time. The S&P 500 has risen an average of about 10 percent per year over long periods of time. Index funds typically have lower fees or expense ratios than actively managed mutual funds.
4. Bonds and bond funds
Bonds are an investment that allows investors to earn passive income. Typically, companies and governments issue bonds to help finance their operations, and in return they pay interest to investors. Bonds pay investors at regular intervals, usually twice a year. A bond has a certain lifespan, which is called the term. If you hold the bond until maturity, you will receive back the face value of the bond as well as the interest payments.
Another advantage of bonds is their relative stability. They are generally safer investments than stocks, so financial advisors often recommend them to help reduce a portfolio’s volatility. The other side of this coin is that they tend to provide lower returns than stocks in the long term. However, their lower volatility can be beneficial for investors, especially those nearing retirement.
5. High-yield savings accounts and CDs
If you want to earn passive income with minimal risk, one way to do so is through a high-yield savings account at an online bank. The interest on these accounts is usually paid monthly. Although rates can fluctuate often, rates at online banks are usually much higher than the national average. Additionally, these accounts are usually FDIC insured up to $250,000, making them a safe place to keep your money.
Alternatively, you can store your money in a certificate of deposit (CD). These accounts may even pay higher rates than high-yield savings accounts. However, they require you to keep your money in the account for a certain period of time, ranging from several months to several years. If you want to get your money sooner, you will have to pay a fine. CDs are therefore less suitable for short-term savings. To find the best CD rates, look nationally instead of just going with a bank in your area.
6. Peer-to-peer lending
Another way to earn passive income is through peer-to-peer lending. With this investment you lend money to companies or individuals via online platforms. In return, they pay you interest over time. In general, these borrowers cannot or do not want to use traditional financing.
This path can be riskier than other passive flows, but if you are willing to accept more risk, you can earn higher returns. However, you should research potential borrowers and it is useful to spread your risk by lending to several borrowers so that you are not dependent on just one or a few borrowers.
7. Real Estate Investment Trusts (REITs)
If you’re interested in real estate investing but want the convenience of just receiving a dividend check, real estate investment trusts may be for you. With a REIT you can invest in a diversified portfolio of investment properties, and no management responsibility will fall on you as the investor. Instead, REITs pool investor funds to purchase and manage properties such as shopping centers, office buildings, apartment complexes and more.
The best REITs will increase their payouts year after year, giving you a growing income stream and multiple ways to invest in it. You can pick individual REIT stocks or opt for a REIT fund, which diversifies your exposure while still providing you with a nice dividend.
In short
The idea of passive income can be attractive, but it is essential that you carefully research each investment opportunity to understand the risks and potential returns. What may seem like a great opportunity can leave a hole in your savings, setting you further back on your path to wealth.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
