How to earn passive income: 15 ways to consider
For many people, toiling for a living isn’t fun.
There can be lengthy commutes, dress codes, annoying coworkers, unreasonable supervisors, taxing physical labor, insufficient vacation time, heavy workloads, and a lack of appreciation, among many other things.
Thus, it’s easy to dream of money just arriving, without our having to clock in to earn it. Fortunately, passive income streams don’t have to be a dream. There are many sources, with examples including REIT dividend income, residual money, real-estate investments, interest, and other income-generating assets. Here’s a look at 15 of them — see which opportunities could work for you.
One of the simplest ways to enjoy passive income streams is to buy stock in healthy and growing companies that pay dividends. Better still, look for dividends that have been increased regularly at a good clip (many companies often hike their payouts annually) and that have room for further growth, as evidenced by a dividend payout ratio of around 70% or less. The payout ratio is the amount of the annual dividend divided by the trailing 12 months‘ earnings per share. It reflects the portion of earnings being paid out in dividends. The lower the ratio, the more room for growth. A ratio above 100% means the company is paying out more than it earns, which isn’t too sustainable. Here are some examples of stocks you might consider and research further:
Stock
Recent dividend yield
AT&T
5.3%
National Grid
5%
Duke Energy
4.5%
Verizon Communications
4.5%
Pfizer
3.7%
Flowers Foods
3.5%
General Motors
3.4%
China Mobile
3%
Data source: Yahoo! Finance.
Another kind of dividend to collect is from real estate investment trusts, or REITs. They’re companies that own real-estate-related assets, such as apartments, office buildings, shopping centers, medical buildings, storage units, and so on — and they are required to pay out at least 90% of their earnings as dividends. They aim to keep their occupancy rates high, collect rents from tenants, and then reward shareholders with much of that income. If you’re interested in real estate as a way to make money, check out these examples of REITs to consider as investments:
REIT
Property focus
Recent dividend yield
Iron Mountain
Document storage
6.6%
Welltower
Healthcare
5.9%
Realty Income
Retail
5%
Public Storage
Storage units
4.1%
Host Hotels and Resorts
Hotels
3.9%
Digital Realty Trust
Data centers
3.5%
Data source: Yahoo! Finance.
Another way to wring income out of stocks, even if they don’t pay dividends, is to buy stocks that you expect will appreciate in value over time and then, when you need income, sell some shares. If you have a fat portfolio of such stocks when you retire, you might sell some shares every year to create a cash stream for yourself. Studying and choosing the stocks that will perform very well for you is easier said than done, though, so if you don’t have the interest, skills, or time to become your own stock analyst, consider simply investing in a low-fee broad-market index fund or two, such as one based on the S&P 500. Here’s how much you might accumulate over several periods if your investments average 8% average annual growth:
Growing at 8% for…
$5,000 invested annually
$10,000 invested annually
$15,000 invested annually
10 years
$78,227
$156,455
$234,682
15 years
$146,621
$293,243
$439,864
20 years
$247,115
$494,229
$741,344
25 years
$394,772
$789,544
$1.2 million
30 years
$611,729
$1.2 million
$1.8 million
Calculations by author .
Among the many passive-income opportunities that exist, interest is a very popular one, along with dividends. Unfortunately, we’ve been living in an environment of ultra-low interest rates for many years now, so even a savings account with $100,000 in it might only grow by $1,000 or $2,000 per year. Interest rates seem to be rising, though, so take heart — and know that in many past years, bank accounts and CDs and bonds have paid rates of 5%, 8%, and even 10% or more.
While stocks are terrific income producers, they can be volatile. Every few years, the stock market tends to stagnate or drop for a while before recovering, and that can be problematic if you were counting on your stocks having a certain value at a certain time. One way to lock in an income stream is by buying a fixed annuity (as opposed to variable or indexed annuities, which can have steep fees and overly restrictive terms). Annuity contracts will be more generous when interest rates are higher, but here’s how much income they might deliver at recent rates:
Person/people
cost
Monthly income
Annual income equivalent
65-year-old man
$100,000
$541
$6,492
70-year-old man
$100,000
$620
$7,440
70-year-old woman
$100,000
$579
$6,948
65-year-old couple
$200,000
$921
$11,052
70-year-old couple
$200,000
$1,019
$12,228
75-year-old couple
$200,000
$1,160
$13,920
Data source: immediateannuities.com.
Income-generating assets are another of many passive-income opportunities. A classic example is making money in real estate via owning rental properties. It can seem perfect: You buy an apartment building or house, rent it out, and then sit back and collect checks every month from your tenants. The reality isn’t always so rosy, though. For one thing, you’ll need to maintain and repair the property, as well as paying taxes on it and insuring it. It may not always be occupied, either. You may have trouble finding tenants, or finding tenants who pay their rent reliably. Some tenants may damage the property, and others may be hard to get rid of. You’ll be the one they call in the middle of the night if the roof is leaking, and you’ll have to clean and perhaps freshen up the property between tenants. You can outsource much of this to a property management company, but it will take a cut of your income, often about 10%.
You might not think of paying down debt as an income-generating activity, but it kind of is. Think of it this way: If you owe $10,000 and are paying 20% interest on it, that’s $2,000 in interest payments annually. Ouch. Pay off that $10,000, though, and you’ll be keeping that $2,000 in your pocket. It’s very much like earning a guaranteed 20% return on the debt that you retire, and 20% annual returns are way more than you can expect from the stock market or elsewhere. Note that some credit cards may be charging you 25% or even 30% interest, so paying such debt off as soon as possible is a no-brainer financial goal.
Speaking of credit cards, if you don’t use them to rack up debt, you can instead use them to generate income streams for you — via their cash-back or rewards programs. Some cards offer flat-rate cash-back percentages up to about 2%. Others target certain kinds of spending or certain retailers. If you spend a lot at Amazon.com, for example, you can get a card that rewards you with 5% cash back there — which can really add up. (It’s not hard to spend $250 per month at Amazon, which is $3,000 per year — enough to earn $150 back.)
Other stores with associated credit cards include Target, Costco, Gap, Lowe’s, TJX, Toys R Us, and Wal-Mart. Many offer 3% to 5% in cash back or discounted prices, and many offer other perks, too, such as free shipping on items purchased at the sponsoring retailer, while others might let you return items without a receipt, or will donate money to charity whenever you use the card. If you travel a lot, you can use travel-related credit cards to rack up lots of points and rewards that can be used instead of cash, keeping more cash in your pocket.
You can also generate residual and royalty income for yourself by producing things that might then pay you again and again. This isn’t 100% passive income, as there’s some initial work involved, but if all goes well, once you’ve done the work, you’ll be paid repeatedly over a possibly long period of time.
For example, you might take photos and have them available for a fee at sites such as shutterstock.
