In the digital age, the term “passive income” is often heard in our conversations, on our favorite podcasts, in the media, etc. If you have debt to pay off, retirement nest egg goals, or some other project in need of some financing, you probably already work pretty hard. Getting a part time job isn’t always the best option and burnout prevents round-the-clock hours for productive engagement.
Passive income refers to money acquired with little to no continual, engaged effort; there are some stocks investors who already select assets with this energy expenditure in mind.
When people talk about passive income, they have likely heard about a side hustle of some kind which, after some initial effort, makes money for them while they are away doing other things. Active income is your day job whereas passive income, more or less, just happens without you clocking in and out of an office. For those looking to live more and work less, or, those who have particular projects and financial goals they want to meet and already have a day job which just doesn’t quite generate enough, passive income can help tremendously.
Passive income includes scenarios such as buying a house and renting it out to generate income or a writer who makes the initial effort of writing a book and then receives royalties after the book is published. Signing up for a credit card which rewards customers with cash for various purchases is a small, but, applicable version of generating passive income while shopping.
When it comes to stocks, investors who choose dividend paying stocks or other strategies listed in this article create passive income following the purchase of the stock.
If you’re seeking the right stocks for passive income, you will want to know what the IRS thinks about this kind of revenue.
The IRS is most definitely interested in passive income and particularly invested in high cost assets such as real estate, financial market investments, and private entrepreneurial adventures. The way it’s defined by the government is active income requires your “material involvement” whereas passive income means one is not “materially involved” with the revenue.
Nonetheless, income is income and the IRS will expect tax money either way. The good news is losing money in what the IRS defines as “passive income” can be written off as a tax deduction (meaning one makes passive income either way).
Here are 5 ways to make stocks work for you to generate passive income for your personal financial goals:
There are countless options for generating passive income. A great source for those interested in bigger projects which express personal interests can find daily inspiration and success stories at Side Hustle School.
For those who want to take the stock market route, here are some strategies to employ to make it easy to bring in more income while sleeping, eating, working, and just living your life.
#1: Stock dividends are one easy way to generate passive income.
There are some stocks out there which pay out some impressive dividends to investors in their company. A dividend is money paid on the regular, often per quarter, by a company, out of its own profits, to shareholders. It’s a little like working for the company, but, never having to show up for work. As an example, if you own $100 shares in a company paying out 3% to shareholders, you will make an extra $3 for each share. If you are wise about selecting your stock investments, every little bit will add up and create passive revenue.
#2: Learning how to invest in ETFs is another strategy for creating revenue without heavy lifting or extensive monitoring.
The stock market can be intimidating and feel like more work and sweat than is worth it when starting out. A great place to start is investing in mutual funds and exchange-traded funds (ETFs). When you invest in either of these options, you essentially purchase tried-and-true bundles of different stocks all at once. These stocks are usually of the same general type (energy stocks, transportation stocks, biotech stocks, etc.) and the investor will pay a fixed price into the fund. Some examples of these sorts of funds demonstrate the reduced involvement required of the investor to generate income.
#3: Index funds are a type of mutual fund attached to a particular market index which has the potential to bring in more passive revenue.
Buying index funds require passive management after the initial purchase. The very design of these funds tracks a certain performance of a specified index. There are securities included with the purchase of index funds which generally means the management fees are lower (save for instances when the index changes). The low turnover rate makes for a more tax-efficient asset than some other forms of stock investments.
#4: To truly sit back and just watch your money grow, consider buying stocks and bonds.
Bonds tend to have a high ROI; according to Vanguard Funds, bonds returned 7.1% over a 45 year period. This is not a guarantee, but, bonds and stocks offer more opportunity for growing wealth than a savings account. According to The Street, “From 1973 to 2016, for example, Standard & Poor’s 500 stocks returned 11.7% annually – a solid return on the dollar for stock market investors over that time period.”
#5: Let your stock research earn you insight into another form of passive income known as Peer-to-Peer (P2P) lending.
Companies and individual entrepreneurs sometimes lack the funding needed to grow their businesses and improve their stock options. Adding passive income to one’e portfolio is made simple through this system of removing the middle man and helping businesses grow in a more direct way. Two larger platforms for P2P are the Prosper and Lending Clubs which permit investors to fund loans with as little as $25. This method is a little riskier since investors have no control over whether or not the company makes smart use of the money they receive. These loans are, however, repaid with interest and the highest rates are applied to the companies at the greatest credit risk. ROIs range from 5-12% for what is minimal effort. Just offer the loan money, then, sit back and watch the payments come in.
For more information on specific stocks to hold for long term gains, read 5 Stocks To Buy And Hold For The Long Run.