Passive income is money earned that doesn’t require a lot of effort or active involvement from you. In other words, it's income that you earn without actively working for it regularly. Passive income streams often require an upfront investment of time, money, or resources, but once set up, they can generate income regularly with relatively little ongoing effort. There are a few different ways to generate passive income that can be done through investing.
Dividend stocks
Dividend income is a favored strategy for investors seeking a steady stream of passive income. Dividends are a kind of reward paid to investors by certain companies they are invested in. This can either be in the form of additional shares at a specific ratio or a cash pay-out. The amount you receive depends on how many shares you own.
Not all companies pay dividends. Whether a company pays dividends depends on various factors, including its financial health, growth prospects, and the decisions made by its management and board of directors.
While some companies can only afford to pay investors dividends once a year, some can pay as much as quarterly, or even monthly. On the other hand, special dividends are paid out to investors on rare occasions or once in a while, depending on the company’s performance.
Consider including regular monitoring of dividend-paying companies in your research.
Dividend ETFs
Dividend Exchange Traded Funds (ETFs) are investment funds that are traded on stock exchanges, and they specifically focus on holding a diversified portfolio of dividend-paying stocks. These ETFs provide investors with a convenient way to gain exposure to a broad range of dividend-paying companies without having to buy individual stocks.
Dividend yield is an important metric for dividend ETFs. It represents the annual dividend income as a percentage of the ETF's current market price. Higher dividend yield may indicate a higher income potential, but it's important to consider other factors like the sustainability of dividends.
Dividend ETFs like the Vanguard Dividend Appreciation ETF focus on US stocks with a history of increasing dividends.
ETFs are considered a low-cost way to invest because you can get access to several different shares with one transaction.
You can find and compare dividend ETFs by performance, size, risk, asset class, strategy, and more by using online tools like Yahoo! Finance or check out our very own EasyCompare tool.
Rental income
Rental income from property can be a good way to earn passive income. Owning a physical property and renting it out is one route to go. However, this requires massive capital outlay (the price of the property you are buying) and so becomes less accessible for many people. In addition, managing rental properties can require time, effort, and expertise. This includes dealing with tenant issues, maintenance, and potential legal matters.
Net rental yield provides a measure of the return an investor can expect to receive from rental income after deducting certain expenses. It is calculated by expressing the annual rental income earned from a property as divided by how much the property cost. Investors often seek higher net rental yields as they indicate greater potential for income generation.
Government bonds
A government bond is a way for a government to borrow money from investors. When you purchase a government bond, you are essentially lending money to the government in exchange for periodic interest payments and the return of the principal amount at maturity.
Government bonds can be considered a form of passive income, as they provide regular interest payments to bondholders without requiring active involvement.
Investors in government bonds receive regular interest payments and get the return of their principal when the bond matures, making them a source of income and a way to preserve capital.