Some people will tell you that the idea of passive income is nothing more than a myth. I'm here to tell you they're wrong.
So far this month, I've received hundreds of dollars in my brokerage account, and I didn't do a darn thing to earn that money. And if you choose the right investments, you can enjoy your fair share of passive income, too.
It's all about the dividends
When you hold stocks, you can make money two ways: share price appreciation and dividends. The latter can be a solid source of passive income because you don't have to do anything to earn it other than hold the right companies in your portfolio.
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Now there are many quality stocks out there that don't pay dividends. The reason? Those companies want to reinvest that money in their respective businesses rather than pay it out to shareholders.
That's not necessarily a bad thing. In fact, I'm often wary of companies with dividends that seem too generous to be true because it makes me wonder why that money isn't going back into the business for growth purposes.
But there's one type of investment where I routinely expect larger-than-average dividend payments and don't stress about the fact that they're so generous -- REITs. Real estate investment trusts are companies that make money by owning and operating different properties. And there's a reason they tend to pay high dividends -- they have to.
REITs get to enjoy certain tax benefits, but to qualify as a REIT, a company must pay out at least 90% of its taxable income to shareholders in dividends. So when I come across a REIT with a high dividend yield, that doesn't tend to trigger a warning in my brain the same way it would with a regular stock.
The benefit of diversification, too
Not only can REITs be a great source of passive income, but they could help you branch out in your portfolio. While the value of REITs can commonly rise and fall in accordance with the stock market's performance, that doesn't always happen.
See, one of the ways REITs make money is by entering into long-term leasing agreements with tenants. So if economic conditions sour, those tenants might keep paying simply because they're obligated to.
As such, even if stocks tank on a whole due to a broad economic downturn, the value of the REITs you own might hold steady during that period of turbulence. And if not, you can at least collect those dividends to offset those on-screen losses.
All told, REITs are really a solid bet if your goal is to set yourself up with passive income, and it pays to consider adding some to your portfolio if you don't have much or any exposure to real estate right now.
Of course, REITs aren't your only option for generating passive income through real estate. You could also buy a rental property or two and enjoy the income it produces. But REITs are a far more hands-off bet, so if that's more your speed, it pays to load up on them.
