In this post, we’ll go over ten passive income ideas to boost your earnings in 2024 and beyond.
1. Dividend Stocks
Investing in dividend stocks is a time-tested way to build a steady income stream. Over the years, Berkshire Hathaway’s initial investment in Coca-Cola stock has produced hundreds of millions in dividends and passive income.
Warren Buffet’s initial investment in Coca-Cola stock in 1988 was $1.3 billion. Berkshire Hathaway’s yearly dividends from Coca-Cola have grown from $88 million in 1995 to $704 million in 2022. The dividend yield for Coca-Cola stock today is currently around 3.0%, which is well above the 1.4% current dividend yield of the S&P 500.
Another advantage of investing in dividend stocks is that they’re typically less volatile than growth stocks or small-cap stocks.
The “Dividend Aristocrats” are companies in the S&P 500 with a long-standing track record of paying dividends and consistently increasing the size of these payouts. These “Dividend Aristocrats” average dividend yield is around 2.6%. The best dividend stocks consistently increase their dividend payout over time and will grow your future income year in and year out.
Keep in mind that as you reinvest your dividends, they can generate additional dividends, which, over time, leads to compounding growth of your portfolio.
2. Dividend Stocks ETFs
Another strategy to invest in dividend stocks is by investing in dividend stocks exchange traded funds (ETFs), which invest in dividend stocks.
Rather than picking and choosing individual dividend stocks to invest in, dividend stocks ETFs are a more passive investing approach because these ETFs hold a well-rounded basket of many dividend stocks that track the performance of an index.
One of the advantages of ETFs is diversification, which helps spread risk. If one company fails or cuts its dividends, the impact on your overall investment is minimal.
Another key benefit is accessibility. Some high-dividend stocks can be costly, so you can either own only a few shares or, if you own more shares, this can make your portfolio too concentrated. However, ETFs make investing in dividend stocks more accessible, allowing you to invest in smaller amounts.
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 Mobile, Johnson & Johnson, and Proctor & Gamble, just to name a few. The fund’s dividend yield is 3.1%.
Let’s look at how much in dividend income you’d earn with a hypothetical portfolio of $250,000 where you invest 50% in SCHD and 50% in VYM. Based on each ETF’s current dividend yields, your annual dividend income would be:
|Annual Dividend Income
|Annual Dividend Income
Overall, this hypothetical portfolio could throw off $8,125 in passive income annually, potentially growing more if the dividend income increases.
But in addition to the dividends, investing in dividend stocks and ETFs can provide 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%.
3. U.S. Treasury Bonds and Municipal Bonds
Bond yields had been falling for decades because the Federal Reserve had kept interest rates low for so long, and as a result, bond prices had risen, and yields had fallen. But recently, yields have gone up and are much more attractive now. This is good news for income investors. Investing in U.S. Treasury bonds and muni bonds are generally safe ways to earn passive income.
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 almost 4.0%. This spike in bond yields gives investors an opportunity to buy Treasury bonds with attractive yields now.
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 benefit from their tax advantages. As of January 5, 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, you’ll want to seek out the bond type that aligns with your tax bracket and look at your after-tax yield.
Having both stocks and bonds in your portfolio can balance the risk of an all-stock portfolio and lower your portfolio’s volatility. You can buy and sell these bonds through your account with your broker online and even within a Roth or traditional IRA account.
4. Bond ETFs
Bond ETFs are a type of exchange-traded fund that invests in bonds. They trade on stock exchanges, like individual stocks, and their prices vary throughout the trading day based on supply and demand.
Investing in ETFs is another popular approach to getting exposure to the bond markets and generating passive income. These ETFs aim to mirror the performance of a specific bond index and can invest in a diverse range of bonds, including government, corporate, municipal, and international bonds.
Bond ETFs 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, so they’re 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.
Note that when the Federal Reserve increases interest rates, bond ETFs may see a decrease in their value. This is because bond ETFs hold a portfolio of many different bonds, and when interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these bonds.
Some of the most popular bond ETFs are:
- Pimco Active Bond ETF (BOND), which has a yield of 4.07%
- Vanguard Intermediate-Term Treasury Index fund ETF (VGIT) which has a yield of 2.73%
- Vanguard Total International Bond ETF (BNDX), which has a yield of 4.44%
- SPDR Portfolio Corporate Bond ETF (SPBO), which as a yield of 4.74%
- iShares National Muni Bond ETF (MUB), which has a yield of 2.64%
5. Real Estate Investment Trusts (REITS)
If you’re interested in real estate without the hassle and significant initial investment of transacting and overseeing properties yourself, a popular way to invest is 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. Here are the main types of REITs.
Equity REITs invest in and own income-producing real estate properties and generate revenue by leasing out the properties they own. Equity REITs have subcategories based on the type of property they invest in, such as residential, commercial, industrial, and healthcare.
Mortgage REITs invest in mortgages or mortgage-backed securities. They generate revenue by earning interest on the loans they make, which can be residential or commercial.
Publicly traded REITs are traded on an exchange like stocks and ETFs, where you can buy and sell them in a brokerage account or within your IRA. They also offer liquidity so that you can trade them easily.
There are some REITs that are not publicly traded, though. Public non-traded REITs and private REITs have much higher minimums and steeper fees than publicly traded REITs.
More than 200 publicly-traded REITs are on the market, and many are known for their high dividend payouts, making them attractive for income investors.
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 5.1%.
AvalonBay Communities Inc. (AVB): is a residential REIT that focuses on developing and managing high-quality apartment communities in New England, the 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 3.6%.
VICI Properties Inc. (VICI) is a hotel/casino vacancies operator. The company has a market cap of around $33 billion and a current dividend yield of 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.
6. REIT ETFs
Investing REITs through REIT Exchange-Traded Funds (ETFs) is another way to gain exposure to real estate without buying properties directly. These are investment vehicles where you invest in a diversified portfolio of REITs and trade on stock exchanges, just like individual stocks.
Here are three popular REIT ETFs that give you exposure to a range of real estate sectors, including residential, commercial, and industrial.
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 4.04%.
The Real Estate Select Sector SPDR Fund (XLRE) is a traded fund managed by SSGA Funds Management. It 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 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 3.30%.
7. Buying Rental Properties
Wealthy investors usually look beyond stocks, bonds, and cash. Rental properties have long been a popular way to earn passive income while offering some unique benefits. You can set up a steady income stream by getting a property and leasing it out through monthly rent payments. This can diversify your investment portfolio and give you the potential for property value appreciation.
The downside of managing rental properties is that it takes work, so it’s not entirely passive. 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 can consider using a property management company to handle these tasks, but your income will be lower after accounting for their fees.
You’ll need to carefully think about and research the location for your target area well and understand what renters are looking for. You can decide to focus on long-term leases or look at short-term rentals through platforms like Airbnb.
Short-term rentals can potentially generate higher rental income than long-term rentals since short-term rentals can charge a higher rate per night. Suppose your rental property is located in a tourist hotspot or area with high demand for temporary lodging. In that case, these can be especially profitable, although a lot more property management is required. Each approach comes with its own pros and cons, so the choice comes down to your preferences and needs.
Investing in any rental property requires planning, ongoing management, and a solid understanding of tax rules. If managed well, rental properties can become a core part of your investments and a steady stream of passive rental income.
8. Private Real Estate Investing Platforms
Private real estate investing platforms have changed the game for investors looking to invest in real estate.
These platforms connect real estate developers with investors who want to back projects through debt or equity. After you put in your money, the platform’s team handles all the rest — assessing deals and buying, renting, and looking after properties. With some platforms, you can even invest in pooled loans backed by real property or put your money into individual property loans.
Private real estate investing platforms vary in their requirements for investors. Some are open only to accredited investors, while others allow non-accredited investors. Here are two private real estate investing platforms to consider:
CrowdStreet is a leading platform in the commercial real estate investment landscape for accredited investors who are looking to diversify their portfolios. CrowdStreet has funded more than 798, invested $4.2 billion, and realized 168 deals.
The platform offers different investment options. Investors can choose to invest in a diversified fund managed by CrowdStreet’s team of real estate professionals or choose a single sponsor fund from specific real estate firms. They simplify the process of investing in commercial real estate projects nationwide by pairing individual investors with project developers. Developers are thoroughly reviewed by CrowdStreet, including background and reference checks. This helps to narrow down the field of commercial real estate opportunities for investors.
CrowdStreet also offers individual deals, where investors can communicate directly with sponsors. Suppose you’re looking for a more personalized approach. In that case, they offer tailored portfolios where an investor is connected with a CrowdStreet advisor who assists you in developing a personalized commercial real estate portfolio.
The platform’s investment horizon is long-term, so you should be prepared for a long-term commitment.
RealtyMogul is a pioneer in the world of real estate crowdfunding and offers investment opportunities to both nonaccredited and accredited investors. RealtyMoguls’s platform offers a wide range of real estate investment options, catering to your preferences and risk appetite. To date, RealtyMogul has overseen $216 million in total realized investment amount and 228 realized investments.
Non-Accredited investors can invest through their Real Estate Investment Trust (REIT) products, which provide accessibility and flexibility.
RealtyMogul’s investment portfolio is predominantly concentrated in the multifamily housing market. This focus on low-risk investments aligns with the company’s commitment to safeguarding investor capital. The company now focuses exclusively on properties that generate cash flow and have a strong outlook for capital appreciation.
With all private real estate investment platforms, you’ll also want to keep in mind that:
- Unlike public REITs or ETFs, investments in these platforms can be illiquid
- These platforms often charge management fees, which will effect your returns
- Do your own due diligence so as to understand what you’re investing in
9. Money Market Accounts and Money Market Funds
Money market accounts are checking and savings accounts that pay interest and have more liquidity than savings accounts. Banks and credit unions offer these 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. With certain funds, income from some government money market funds could be exempt from taxes. Money market funds are offered by online brokers and mutual fund companies and aren’t insured by the FDIC or the NCUA.
The multiple 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, these yields range from 3.0% to 5.25%. This is a huge difference compared to the national average yield for bank savings accounts, which is 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. If you’re keeping cash emergency savings or other planned spending, you’ll want to make sure you’re maximizing your yield.
10. Create Content
Creating content can be a great way to generate a substantial passive income. Whether through a blog, podcast, or a YouTube channel, once you get a flow of visitors and followers, you can start monetizing your content through ads, affiliate marketing, or selling your products like courses, e-books, or downloads.
To be realistic, this isn’t a way to make passive income quickly. It takes serious effort, especially at the beginning, as you’ll need to spend time creating engaging and valuable content that people find valuable.
When you’ve created content that resonates with people and draws traffic, you can then start to earn revenue through display advertising through Google Adsense or by hosting sponsored content, where companies pay you to publish a post on your blog.
Another strategy to profit from a blog is through affiliate marketing. This allows you to earn commissions if your readers purchase a product or service you’ve recommended or linked to.
Selling digital products is another way to generate passive income. Digital products can include anything from ebooks or online courses. Once you’ve created a digital product, you can sell it over again without any additional work.
When it comes to content, there’s a constant need to create fresh content or update existing material to keep it relevant. Content creation can be a great way to earn passive income, but it requires lots of upfront work, dedication, and some creativity.
If you love to create, starting your own blog or online platform can be very rewarding. Some say that making $1,000 on the internet feels like making $5,000 or $10,000 at a regular job.
Tax Treatment of Passive Income
Taxes on passive income can vary depending on the type of income you receive. For instance, income from rental properties or Airbnb rentals is generally taxed as ordinary income based on your tax bracket. As a rental property owner, you can also leverage non-cash depreciation costs to lower the taxes on your rental income.
When it comes to investments such as stocks, bonds, REITs and ETFs, any profits made are typically subject to capital gains taxes, where rates are based on your holding period and tax bracket.
Dividends from stocks are typically classified as either qualified or nonqualified. Qualified dividends are taxed at capital gains rates of 0%, 15%, or 20%, depending on your income level and tax filing status. Nonqualified dividends are taxed as ordinary income at rates up to 37%.
Similar to stocks, dividends from ETFs can be either qualified or nonqualified.
The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37%. However, you may be eligible for a 20% deduction of combined qualified business income, which includes qualified REIT dividends, through December 31, 2025.
The interest income from Treasury bonds is subject to federal income tax, which is exempt from state and local income taxes.
Interest income from municipal bonds is generally not subject to federal income tax, while it can also be exempt from state or local income taxes if you reside in the state where the bond is issued.
Bond ETFs make regular interest payments to shareholders, which are usually referred to as “dividends.” These are not qualified dividends and don’t benefit from lower tax rates. They’re taxed as ordinary income, up to a maximum rate of 39.6%. Some funds can skip federal or state taxes, depending on the type of bonds they hold. Also, bond ETFs can pay capital gains due to buying and selling, which can lead to an annual capital gains distribution.
Interest earned in a money market account is considered as earned income and is taxed based on your marginal tax rate.
Money market funds pay out earnings as dividends, which are generally taxable as ordinary income, with a top bracket of 37%. Dividends from government money market funds that hold U.S. government securities are generally exempt from state and local taxes but are taxed at your marginal interest rate for federal income tax unless the fund is set up to be tax-free.
Whether reported as interest or dividends, the income from a money market is treated as investment income for purposes of computing Medicare tax.
Income from content creation is generally considered self-employment income by the IRS. As a content creator, you’re responsible for reporting all income that you receive on your tax return. In addition to income taxes, you’ll need to pay self-employment taxes. However, some content creators opt to start their own business entity, like a limited liability company (LLC) or a corporation.
Market swings, changing conditions, and new legislation can all have an impact on your investments. Even though they’re called “passive” income, these strategies will still require you to regularly review and adjust them to ensure they align with your financial goals.
Diversifying your income sources is a great way to protect your wealth and can help you grow wealth over time. For some savvy investors, their passive investments have even become a way to replace their active income.