Passive income -- who wouldn't want it? While you have to work for your salary and you might also be working a side gig for extra money, passive income quietly flows to you without much effort on your part.
It's possible, depending on your circumstances, to get to the point where you're raking in more than $25,000 in passive income -- each year. Here are ideas of how you might achieve that.
1. Dividend-paying stocks
Dividend-paying stocks are a terrific proposition for just about any investor, not just those nearing or in retirement. That's because they offer a one-two-three punch: When a dividend payer is healthy and growing, it will deliver dependable income via a dividend, no matter what the economy or stock market is doing. That dividend will also likely be increased over time. And the stock itself is likely to appreciate in value over time.
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Dividends are extremely passive income. You only need to buy a dividend-paying stock, and then you can just start seeing dollars pile up in your investing account -- or you might opt to have them automatically reinvested in additional shares of stock.
Here are a few well-known companies and their recent dividend yields:
Recent Dividend Yield
Real estate investment trusts (REITs) are also stocks that pay dividends, but they're a special kind of stock. They belong to companies that have bought a lot of real estate -- often in one or more niches, such as apartments, industrial sites, or medical buildings -- that they rent out to tenants. (Some REITs, alternatively, are invested in mortgages.) REITs are also required by law to pay out at least 90% of their income in dividend form.
Here are a few well-regarded REITs:
Recent Dividend Yield
W. P. Carey
Digital Realty Trust
3. Rental property
Finally, you might consider investing in actual real estate, to rent it out. This is much more involved than simply buying shares of a dividend-paying stock, or a REIT. You'll need to do a lot of research first, learning a lot about real estate investing, and you'll need to be able to buy such a property or properties, too.
If you're going to be a landlord, be sure to learn what's involved in that, to get an idea of whether it's a good fit for you. Some personalities are not well suited for dealing with tenants who aren't paying rent or who are damaging property. (Yes, you might hire a management company to handle such things, but then you're giving them part of your profits.)
Understand, too, that while plenty of people have made a lot of money owning rental properties, it's not always as lucrative as you might think. You'll probably have to pay a mortgage on it, along with taxes and insurance. You'll need to pay for maintenance, repairs, and upkeep, too.
How to get that $25,000 in passive income
It might take a while to get to $25,000 and beyond in passive income annually, unless you have a lot of money ready to go right now. If you invest in a bunch of dividend payers and your overall average dividend yield is 3%, 4%, or 5%, here's what you can expect in dividend income per year (remembering that healthy and growing dividend payers will tend to increase their payout now and then):
3% Average Dividend Yield
4% Average Dividend Yield
5% Average Dividend Yield
You'll see that sums much bigger than $25,000 are very possible -- though it might take a while to amass an investment account big enough. Once you have passive income coming in, it can really help you financially. For example, you can reinvest those dollars in more shares of stock, or if you're retired, you can simply use the money for living expenses.
Getting to $25,000 annually with rental properties is also possible, but it will all depend on a range of factors, such as the rent you can charge, the reliability of your tenants, the value of the property, the costs you incur, and so on.
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Selena Maranjian has positions in Digital Realty Trust, Medtronic, Realty Income, Starbucks, and W. P. Carey. The Motley Fool has positions in and recommends American Tower, Digital Realty Trust, Intel, Prologis, and Starbucks. The Motley Fool recommends Verizon Communications and recommends the following options: long January 2023 $57.50 calls on Intel, short January 2023 $57.50 puts on Intel, and short July 2022 $85 calls on Starbucks. The Motley Fool has a disclosure policy.