Passive income -- cash that just arrives on its own, automatically -- who wouldn't want it? It might sound like a pipe dream to many people, as it can be hard to imagine how you can achieve passive income, but it's within reach of most of us.
Here's a look at several common kinds of passive income you might strive to set up for yourself. Just having one or a few of these income streams may make a big difference in your life today and can improve your future financial security.
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1. Dividend-paying stocks
Income from dividend-paying stocks is a classic example of passive income. Gobs of companies that are generating more cash than they have productive uses for choose to pay out some of that cash to shareholders. (Younger, fast-growing companies tend to not pay dividends, as they typically need to invest all excess cash in furthering their growth.)
Imagine having a portfolio of stocks worth $400,000 with an overall average dividend yield of, say, 3%. That would kick out about $12,000 annually, or $1,000 per month. Better still, healthy and growing dividend stocks tend to increase their payouts over time -- often annually -- so, in a few years, you may be collecting $13,000 or $14,000 per year. And that's all without lifting a finger -- truly passive income.
There are some fat dividend yields out there these days, too. For example, Verizon Communications recently yielded 6.3%, while Pfizer yielded 6.1%.
2. REITs
There's a certain kind of stock that's known, in part, for fairly generous dividend payments. I'm referring to real estate investment trusts (REITs), which are companies that own lots of properties and earn income by renting them out. They're required by law to pay out at least 90% of their income to shareholders.
REITs tend to focus on one or a few different real estate niches, such as apartment buildings, warehouses, medical facilities, shopping centers, storage facilities, data centers, and so on -- so, if you're interested in REITs, you might invest in ones that focus on niches that seem most promising to you. Some well-regarded REITs include Realty Income (recently yielding 5.8%), American Tower (3.4%), Public Storage (4.2%), and NNN REIT (5.3%).
3. Rental properties
Of course, another way to gain passive income from real estate is to become a landlord, renting out your own properties. I myself much prefer REITs, though, because being a landlord can take some effort and isn't always easy. Still, for some people, this is a viable path to somewhat or mostly passive income.
4. Interest-paying investments
Interest-paying investments are another classic way to reap passive income, but they haven't been worth it in the not-so-distant past, as interest rates were quite low for a long time. They've risen, though, and you can now find certificates of deposit (CDs), high-yield savings accounts, and money market accounts yielding 5% or more. On a $10,000 investment, that's $500 or more per year. Bonds, too, are offering higher yields than in years past.
5. Cash-back credit cards
Here's a passive income source that some people overlook: cash-back credit cards. The best cash-back cards offer a hefty percentage of your purchase amount back -- in the form of a statement credit or perhaps via a rewards program. One card I own, for example, pays me 6% back on all my grocery shopping, while another gives me 5% back when shopping at Amazon.com. A third card simply pays me 2% back on any spending.
You do have to spend some money to get some money with this passive income strategy, and you should never be spending just to be getting dollars back. But most of us do spend meaningful sums regularly, so it's worth trying to get as much back as you can. If you spend, say, $400 per month at supermarkets, that's $4,800 per year, and 6% back would be $288. If you spend $5,000 per year at Amazon and get 5% back, that's $250. These sums can add up.
6. Social Security
Finally, there's good old Social Security. It's not passive in the sense that you worked for many years and paid into the system -- but once you reach retirement age and claim your benefits, it's a beautiful stream of passive income. And better still, Social Security benefits tend to increase annually due to cost-of-living adjustments -- or "COLAs."
Read up on Social Security before you take any actions regarding it, because you'll want to claim your benefits at the optimal time for yourself. You can claim them as early as age 62, but your checks will be smaller (though you'll receive more of them) -- and if you delay, up to age 70, your checks will be bigger (though you'll receive fewer, in total).
These are some of the main ways out of many to generate passive income for yourself. See which ones will serve you best.
