Who wants passive income?
The question is, really, who doesn’t want passive income?
The biggest draw that entices people to earn passive income is that it allows you to make money while you sleep. You’ve read dozens of articles on how to create passive income streams. Most passive income ideas require some initial capital. If no initial capital is required upfront, it’s more likely an active income.
Here are some of the most practical passive income ideas you can start implementing.
1. Dividend stocks
Investing in dividend stocks is one of the best ways to build an income stream.
The S&P 500’s average dividend yield is about 2.91%, but its current yield is around 1.78%. Dividend stocks have been favored by income-seeking investors for years because of their stability. A $100,000 dividend portfolio with a current 1.8% dividend yield will generate around $900 per quarter, or $300 per month in dividend income.
2. Dividend ETFs
If you don’t want to pick individual stocks, dividend ETFs invest in a basket of dividend-paying stocks. ETFs give you diversification, ease of trading, and a potential for steady income.
Two popular dividend ETFs are the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard High Dividend Yield Index Fund ETF Shares (VYM).
SCHD tracks the total return of the Dow Jones U.S. Dividend 100 Index and holds stocks such as AbbVie, Broadcom, Coca-Cola and Verizon, just to name a few. The fund’s current dividend yield is 3.4%.
VYM tracks the performance of the FTSE High Dividend Yield Index. The fund holds stocks such as JP Morgan Chase, Exxon Mobile, Johnson & Johnson and Proctor & Gamble, just to name a few. The fund’s dividend yield is 3.1%.
Let’s look at how much dividends you’d earn with a hypothetical portfolio of $250,000. You invest 50% in SCHD, and 50% in VYM. Based on the current dividend yields, the annual dividend income generated from each ETF would be:
SCHD: $4,250
VYM: $3,875
This portfolio throws off a passive income of $8,125. On top of dividends, investing in dividend ETFs can provide capital appreciation. Assuming all your dividends were reinvested, SCHD’s 10-year total return from 2014 to 2023 for SCHD was 191%.
For VYM, assuming all your dividends were reinvested, the 10-year total return from 2014 to 2023 was 146%.
3. U.S. Treasury bonds and municipal bonds
Bonds, typically a defensive asset, usually provide stability. U.S. Treasury Bonds and municipal bonds make regular interest payments and and come with tax benefits. They’re less risky than stocks, and provide a predictable income stream.
Bond yields now attractive, with the 10-year U.S. Treasury yield at ~3.88%, up from 0.51% in August 2020, and the yield on AAA-rated municipal bonds (or muni bonds) with a 30-year maturity was 3.40%.
Both give you passive income. The choice between Treasury or muni bonds will depend on your tax bracket. Having both stocks and bonds in your portfolio can balance higher risk from stocks with the stability of bonds.
4. Bond ETFs
If you don’t want to pick individual bonds, bond ETFs are popular investment vehicles that provide exposure to the bond market. These ETFs invest in a basket of bonds and gives you liquidity, diversification, and income generation.
Some popular bond ETFs are:
- Pimco Active Bond ETF (BOND) which has a yield of 4.07%
- Vanguard Intermediate-Term Treasury Index fund ETF (VGIT) which has a yield of 2.73%
- iShares National Muni Bond ETF (MUB) which has a yield of 2.64%
- Vanguard Total International Bond ETF (BNDX) which has a yield of 4.44%
- SPDR Portfolio Corporate Bond ETF (SPBO) which as a yield of 4.74%
5. Money market funds
Money market funds, a type of mutual fund, invest in low-risk securities like short-term government debt or corporate bonds.
They differ from FDIC-insured money market accounts, which are closer to savings accounts.
The Federal Reserve’s rate hikes between March 2022 and July 2023 boosted money market fund yields, benefiting investors. As of January 2024, these funds yield an average of around 5.20%, much higher than the 0.45% average yield for bank savings accounts.
A $50,000 investment in a money market fund could yield an extra $2,600 in interest over a year compared to a savings account, while being liquid and easily accessible.
6. Real estate investment trusts (REITS)
Real Estate Investment Trusts (REITs), similar to mutual funds, are corporations owning commercial real estate assets.
They allow you to earn income from real estate without direct ownership or management. REITs can be publicly traded, offer high dividends and liquidity.
The best part is that they’re great for building passive income without the hassle and costs of having to deal with property management.
Here are two popular REITS:
- Realty Income Corporation (O), a net lease REIT popular among investors, has a market cap of around $39 billion and a dividend yield of 5.17%.
- VICI Properties Inc. (VICI), a hotel/casino operator, has a market cap of around $33 billion, a dividend yield of 5.24%, and owns assets like Caesars Palace and MGM Grand.
7. REIT ETFs
REIT ETFs allow you to invest in a diversified portfolio of REITs, and give you exposure to real estate without direct property ownership.
Two popular REIT ETFs are: JPMorgan Realty Income ETF (JPRE) and Vanguard Real Estate ETF (VNQ), with dividend yields of 3.00% and 4.00% respectively.
8. Buying rental properties
Rental properties have long been a popular source of passive income. They provide steady income through rent and the potential for property value appreciation.
Of course, they require active management, including finding tenants, maintenance, and updates. The management can be outsourced to a property management company, but this reduces your income.
Location is crucial when investing in rental properties, so you’ll need to do your research or partner with a knowledgeable real estate agent.
You can go with long-term leases or short-term rentals via platforms like Airbnb. This strategy is less passive than others, but if done right, you can eventually become a wealthy landlord.
9. Creating content
This one isn’t passive, but eventually can be. Create high-quality, engaging content to generate income by attracting traffic to your blog or other social media platforms.
This method requires real initial effort and continuous content updates, but so is the potential for a substantial income over time. Creating content doesn’t require a lot of capital upfront. You’ll need to be seen as an authority or ‘expert’ or provide some value for people to spend their time or dollars on you.
Gain enough followers, build an email list, and you’ll be able to monetize your content by selling products, or run ads on your blog. Some say making $1,000 on the internet is like making $10,000 at a job.
Managing your investments
Passive investments are investments, so you’ll need to monitor and make adjustments as needed to maintain your portfolio and income. At times you’ll need to make changes when conditions change due to market shifts.
Your resources are finite, and it’s about how you allocate them. If you have little or no capital, you’ll first need active income to build up capital.
I’ve been boosting my earnings from each methods over years. If you’re disciplined, the ultimate goal is to entirely replace your active income.
And how sweet would that be?
