Passive income is a popular topic in the world of personal finance. According to Business Insider and Forbes, it’s also a significant wealth generator for many millionaires.

But what exactly is passive investment income, and how can you leverage it to boost your income?   

Passive income is income that’s earned without active involvement, typically through investments or other business investments. This is the opposite of active income, such as a salary or running a business, where you’re paid for your work. 

Investing is one of the best ways to generate passive income. Let’s explore nine top passive income investment strategies.

One time-tested way to build a steady income stream is investing in dividend stocks. Warren Buffet’s initial investment in Coca-Cola stock in 1988 was $1.3 billion. Since then, Berkshire Hathaway’s yearly dividends alone, from Coca-Cola have grown from $88 million in 1995 to $704 million in 2022. 

The best dividend stocks consistently increase their dividend payout over time and can grow your future income year in and year out. As you reinvest your dividends, they can generate additional dividends, which over time leads to compounding growth of your portfolio.

Another strategy to invest in dividend stocks is by investing in dividend stocks exchange traded funds (ETFs). 

Instead of picking individual stocks to invest in, you can invest in dividend stocks ETFs which hold a basket of many dividend stocks that track the performance of an index. If one company fails or cuts its dividends, the impact on your overall investment is minimal. 

Two popular dividend ETFs are the Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard High Dividend Yield Index Fund ETF Shares (VYM):

SCHD tracks the total return of the Dow Jones U.S. Dividend 100 Index and holds stocks such as AbbVie, Broadcom, Coca-Cola, and Verizon, just to name a few. The fund’s current dividend yield is 3.4%. 

VYM tracks the performance of the FTSE High Dividend Yield Index. The fund holds stocks such as JP Morgan Chase, Exxon Mobil, Johnson & Johnson, and Procter & Gamble, just to name a few. The fund’s dividend yield is 3.1%. 

Dividend stocks ETFs can also deliver capital appreciation. Assuming all your dividends were reinvested, SCHD’s 10-year total return from 2014 to 2023 for SCHD was 191%.

For VYM, assuming all your dividends were reinvested, the 10-year total return from 2014 to 2023 was 146%. 

I’ve invested in both dividend stocks and dividend stocks ETFs for years, and both make up a core part of my investment portfolio.

Bond yields had been falling for decades because the Federal Reserve had kept interest rates low for so long. As a result, bond prices had risen, and yields had fallen. But recently, yields have gone up and are attractive now.

Treasury bonds are long-term, fixed-interest federal debt securities issued by the U.S. Treasury. They pay interest semi-annually, and the income received is taxed only at the federal level. 

The 10-year Treasury bond yield, which was at only 0.51% in August 2020, is now at around 4.0%. This spike in bond yields gives investors an opportunity to buy Treasury bonds with attractive yields.

Municipal bonds, also known as “munis,” are debt securities issued by states, cities, counties, and other governmental entities to fund public projects such as schools, highways, and bridges. The interest income from most municipal bonds is exempt from federal taxes and might also be exempt from state and local taxes (if you live in the state where the bond is issued).

Municipal bonds can be a great addition to your portfolio if you’re a high earner since you can benefit from their tax advantages. As of January 2024, the yield on AAA-rated municipal bonds with a 30-year maturity was 3.40%.

Both U.S. Treasury bonds and municipal bonds:

• Pay interest, typically semi-annually and provide a regular income stream.
• Are generally considered lower risk than stocks. 
• Muni bonds have federal, state and local tax-exempt status, and can increase the effective yield of your bond investment.

When choosing the type of government bonds to invest in, make sure to look at your after-tax yield.

Bond ETFs are a type of exchange-traded fund that invests in bonds and have several advantages over investing directly in bonds. For instance, bond ETFs hold a portfolio of many different bonds, which can help spread risk. They trade on an exchange which makes them very liquid. 

Compared to bonds, bond ETFs don’t have a maturity date. This means that when you decide to sell, the price of your ETF may be higher or lower than when you bought it. 

If you don’t want to spend time researching and selecting individual bonds, bond ETFs can provide a simpler way to gain exposure to the bond market.

Some things to be aware of when investing in bond ETFs relate to how interest rate movements impact their value. When the Federal Reserve raises interest rates, it can cause the prices of existing bonds to decline. This is because newly issued bonds will offer higher yields than older bonds in the market. 

Some of the most popular bond ETFs are:

• Pimco Active Bond ETF (BOND) which has a yield of around 4.07%
• Vanguard Intermediate-Term Treasury Index fund ETF (VGIT) which has a yield of around 2.73%
• Vanguard Total International Bond ETF (BNDX) which has a yield of around 4.44%
• SPDR Portfolio Corporate Bond ETF (SPBO) which as a yield of around 4.74%
• iShares National Muni Bond ETF (MUB) which has a yield of around 2.64%

Investing in REITs through REIT ETFs is another way to gain exposure to real estate without buying properties directly. Here are three popular REIT ETFs which give you exposure to a range of real estate sectors. 

Vanguard Real Estate ETF (VNQ) is an exchange traded fund that tracks the performance of the MSCI US Investable Market Real Estate 25/50 Index, which includes companies that invest in commercial and residential real estate. The funds’ current dividend yield is around 4.04%.

The Real Estate Select Sector SPDR Fund (XLRE) is an exchange traded fund which invests in companies operating across many sectors across real estate, such as equity REITs and diversified and industrial REITS. The funds’ current dividend yield is around 3.38%.

JPMorgan Realty Income ETF (JPRE) is an exchange traded fund that invests in stocks of companies operating across real estate and equity real estate investment trusts sectors. The fund’s current dividend yield is around 3.30%.

When investing in REIT ETFs, be sure to research the underlying investments and understand their investment objectives and strategy.

If you’re interested in getting exposure to real estate, a popular way to invest are Real Estate Investment Trusts (REITs). REITs are unique because they’re mandated to distribute at least 90% of their taxable income to shareholders as dividends. 

There are different types of REITs but the most popular are Equity REITs. These REITs invest in and own income-producing real estate properties and generate revenue by leasing out these properties. 

Many REITs are publicly traded on an exchange like stocks and ETFs and can be bought and sold in a brokerage account or in an IRA. There are more than 200 publicly traded REITs on the market. Three popular publicly traded REITs are: 

Realty Income Corporation (O) is a well-known REIT among many retail investors and institutional investors. Realty Income operates as a net lease REIT with a market cap of around $39 billion and a current dividend yield of around 5.1%.

AvalonBay Communities Inc. (AVB): is a residential REIT that focuses on developing and managing high-quality apartment communities in the New England, New York/New Jersey Metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California. The company has a market cap of around $25 billion and a current dividend yield of around 3.6%.

VICI Properties Inc. (VICI) is a hotel/casino vacancy operator. The company has a market cap of around $33 billion and a current dividend yield of around 5.2%. VICI owns some high-quality assets such as Caesars Palace, MGM Grand, Park MGM, Mandalay Bay, New York New York, and The Mirage.

Before you invest in REITs, do some research, and pay attention to financial components like the REIT’s debt load and ratios, sources of capital, dividend payout ratios, and free cash flow levels. Higher leverage can spell trouble in a recession while lower payout ratios provide more flexibility.

Rental properties have long been a popular way to earn passive income while offering some unique tax benefits. This can be a great way to diversify your investment portfolio while also giving you the potential for property value appreciation.

The downside of managing rental properties is that it takes work, so it’s not entirely passive. 

As someone who’s bought and managed properties in the past, I can say that being a landlord comes with some headaches. You’ll need to handle things like marketing the property, keeping it in good shape, and making any necessary upgrades to keep tenants happy. 

You’ll also need to focus on a strategy: long-term leases or short-term rentals through platforms like Airbnb. Each approach has its pros and cons, so the choice comes down to your preferences and needs.

I personally prefer the certainty of long term leases, but depending on the location of your property, short-term rentals can provide higher rental incomes.

Directly buying commercial property has high barriers and comes with property management overhead. Over the years, private real estate platforms have emerged which seek to overcome these hurdles.

These platforms raise capital from many investors and acquire larger properties that would typically be out of reach for most investors. Some advantages private platforms provide are:

– Lower capital requirements for real estate exposure  

– Professionally managed properties and contracts

– Access to larger, institutional quality deals

– Diversification across multiple properties and regions

Some well known private real estate investment platforms include:

• Fundrise
• Rich Uncles
• Groundfloor 
• RealtyShares
• RealtyMogul 

With all private real estate investment platforms, you should keep in mind that:

• Unlike public REITs or ETFs, these investments can be illiquid
• These platforms often charge management fees which affect your returns

I personally haven’t used any of these platforms, but they could make sense for you if you want exposure to a portfolio of properties without having to commit a lot of capital. However, before committing capital, be sure to conduct your due diligence and understand the fee structure and lock-up periods.

Money market accounts are a type of checking and savings account that pays interest and has more liquidity than savings accounts. These are offered by banks and credit unions and are insured by the FDIC or the NCUA.

Money market funds, however, are a type of mutual fund that invests in low-risk, short-term debt securities such as Treasury bills, commercial paper, and certificates of deposit.

The Federal Reserve rate hikes throughout 2023 had a direct impact on the yields of money market accounts and money market funds. As of January 2024, the yields on these range from 3.0% to 5.25%. Compare this to the national average yield for bank savings accounts, which stands at 0.45%.

If you were to invest $50,000 in a money market fund today, after 12 months, you’d have an extra $2,575 in interest on average than you’d get from parking that cash in a savings account.

Final Thoughts

Market swings, changing conditions, and new legislation can all have an impact on your investments. Although called “passive” investment income, these strategies still require you to monitor and regularly review them, to make sure that they stay aligned with your objectives.

For some savvy investors who put in the work to better position their money to work over the long term, their passive investments have become a way to replace their active income altogether.

Overall, setting a goal of diversifying your income sources through active and passive income is a great way to protect and grow your wealth over time.