Passive income investments are the best way for you to earn money while you sleep, pursue hobbies, eat, or spend time with family/friends. I listed the best passive income strategies for investors and gave each one a PIS (Pasive Income Source) based on how much effort & ROI you'll get after you set up the system.
1. Dividend Investing
Building a solid dividend portfolio of stocks/ETFs/index funds is a simple and easy way for you to earn money on autopilot. It's the same strategy used by many popular FIRE bloggers who retired from their careers in their 30's.
You invest money into individual stocks or ETFs/index funds that pay you a monthly/quarterly dividend on a regular basis. Companies like Apple, Walmart, and AT&T send quarterly payments to their shareholders as a way to pay out some of the profits generated. You can check out my own dividend income where I earn between $10 to $30 per month from companies who send me dividend payouts.
Most dividend companies are larger, more mature corporations who can safely payout profits over time. REITs also pay out dividends to their shareholders too. Some REITs tend to be smaller companies because a REIT by defintion is required to pay out 90% of its income to shareholders.
The best place to start looking for dividend companies is the S&P Dividend Aristrocats. These are companies who have increased their dividends for at least 25 years in a row. You can buy stock in these companies and receive a dividend payout every 3 months. As you can see from the chart below, S&P 500 Aristrocrats have outperformed the S&P 500 index over the last 10 years.
There are a couple key things to pay attention to when buying dividend stocks.
- Dividend Annual Payout: The total sum of money paid out per share to shareholders
- Dividend Yield: The percentage of income paid out to shareholders based on the following equation: (Annual Dividend / Stock Price) x 100 = Dividend Yield %
- Payout Ratio: The percentage of dividend income / net profit as a ratio to show how much of a company's profit is paid out to shareholders
- Cum Dividend Date: The time when a company declares a dividend but hasn't paid it out yet.
- Ex-dividend Date: The date before the record date when you must own the stock to receive the dividend.
I like to buy dividend stocks that yield at least 3% annually and have paid dividends for at least 25 years. I also own a few dividend growth stocks like Ally (ALLY) and Visa (V) but the majority of my portfolio is invested in dividend aristocrats.
You can research to see if a stock pays a dividend by checking out the Forward Dividend & Yield in Yahoo! Finance. Here's an example of Walmart (WMT):
High growth stocks in fast growing sectors (Technology and internet) usually don't pay out dividends because they reinvest the money back into the business. Popular stocks like Tesla (TSLA) and Amazon (AMZN) don't pay out dividends. If a company doesn't pay a dividend, it will show up blank on Yahoo! Finance. Here's an example:
Don't like investing in stocks? There is a great alternative for investors who don't like taking on too much risk: ETFs and index funds.
ETFs/Index funds pay out dividends just like stocks except you spread out your risk across a large basket of stocks. They are less volatile than individual stocks but can earn passive income through dividends.
ProShares S&P 500 Dividend Aristrocrats ETF (NOBL) invests in companies that raised their dividend for at least 25 years. Some of the ETFs largest holdings are Target (TGT), Abbvie (ABV), and Johnson & Johnson (JNJ). Here's a look at NOBL's historical returns:
I recommend using Dividend.com as a good starting place for researching dividend stocks/ETFs.
Overall PIS Score = 9/10
2. High Yield CDs (Certificates of Deposit)
COD (Certificates of Deposit) are some of the best passive income investments that pay money with very little risk.
A CD is a type of savings account that pays you a high inteerest rate if you agree to keep the deposit for the full term. The most common CD terms are 6, 12, 18, 24, 36, 48 and 60 months.
CDs are some of the safest, low risk investments around. If you are saving up for a big purchase like a house or car then investings in CDs is a safe way to earn passive income.
For example, Ally Bank pays 1.50% for a 1-year CD. You would earn $150 annually in passive income if you deposited $10,000.
When the Fed lowers interest rates, banks respond by lowering their APY on checking/savings account. Buying a CD with a fixed rate locks you into a higher yield in case inteerest rates go down in the future.
CDs have different maturity dates that pay more money for longer terms. If you don't mind tying your money up for at least 1 year then it's a good option.
Here's a list of recommend CD banks:
Overall PI Score = 7/10
3. High Yield Savings Account
High Yield Savings accounts are the best way to earn passive income on your cash because traditional banks pay barely any interests in savings now.
Your money earns more interest while still being accessible to you in case of emergency. Most high yield savings accounts have zero minimums or balance maintenance fees. Your account is also FDIC insured up to $250,000.
I personally use Ally Bank High Yield Savings 1.50% APY because it's easy to use and pays a good interest rates. Here's a quick comparison list of other banks:
If you have your money sitting in a low yield account earning basically nothing, you can gain a 1%+ gain on your money by opening a HYSA.
Overall PI Score = 8/10
4. High Yield Bond Index Funds
5. Real Estate Crowdfunding
Want to put your investing on autopilot? Roboadvisors invest your money in a balanced mix of ETFs based on your risk tolerance. You can choose from a conservative portfolio of bonds ETFs to a more aggressive 100% blend of stock ETFs. Take the guesswork out of investing and earn passive income while you focus on other things.
In the past, brokerage firms charged huge sums of money to actively manage their client's portfolios. But things have changed a lot over the years. Investing apps allow anyone to invest money using new technology that wasn't available years ago. Instead of dealing with clients individually, financial institutions now offer roboadvisor solutions to the passive income investor.
7. Peer 2 Peer Lending
PI Score Summary
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