Passive income strategies: 5 ideas for investors

Explore investment strategies that can potentially generate passive income and help supplement your other earnings.

Unlike regular employment or investments that may require your active engagement, passive income strategies typically require minimal work to generate returns.

However, while producing passive income may sound effortless, these strategies are not without risk — or work. Many require investing your time and money up front.

An Ameriprise financial advisor can help you determine how these strategies could potentially augment your earnings and fit with your risk tolerance, time horizon and financial goals.

Here are five passive income ideas to know. As you consider these options, remember that it’s wise to incorporate multiple strategies to diversify your investment portfolio, as well as consider the possible tax implications:

1. Cash and cash-equivalent investments

Cash investments are short-term investments that offer a return on an invested or deposited principal. These investments require little to no effort, making them an attractive passive income option. However, their returns are typically tied to the current interest rate environment and may fall short of other strategies given their generally lower risk and lower rates of return.

Certain cash vehicles — like sweep accounts and high-interest checking or savings accounts — allow you to earn a return on your money while also allowing you to readily access it. This feature can make them beneficial accounts for emergency fund savings, transactional purposes such as paying bills, making purchases or ongoing investments.

Learn more: How much cash should I have in my portfolio?

2. Bonds

Purchasing a bond involves lending money to a company, municipality, the U.S. government or governmental agency. In return, the issuer agrees to pay you a specified rate of interest over the life of the bond and repay the face value of the bond (the principal) when it reaches maturity. Bonds are typically less volatile than stocks and have a specified maturity and interest payments. However, they also generally receive a lower return than stocks and are exposed to risks such as interest rate risk, credit risk and prepayment risk.

Learn more: What to know about bonds and fixed income investing

3. Dividend-paying stocks

Certain companies return a portion of their profits to shareholders in the form of dividends. When you purchase stocks from these firms, you may receive quarterly payments from the company based on its net income and dividend policy.

These types of equities, known as dividend-paying stocks, may yield more or less than bonds and come with considerably more market price risk as they lack a defined maturity. Keep in mind that a company can, at any time, cut or eliminate its dividend payout, reducing your passive income stream.

Learn more: What are the different types of stocks? An investor’s guide

4. Real estate investment trusts

Buying and managing real estate can require a lot of hands-on attention. Real estate investment trusts (REITs) allow you to invest in large-scale income-producing real estate. They may be a good passive income strategy if you’d like to benefit from the earnings that property can generate but reduce the associated stress.

REITs stand out as a passive income strategy because you can earn a share of the income produced through commercial properties without purchasing the real estate yourself. Their potential downsides, however, include the unpredictable nature of the real estate market and the possibility that a portion of distributions may be taxed as ordinary income. REITs come in two varieties: publicly traded REITs that buy and sell on an exchange like stocks, and non-traded REITs that have more restrictive liquidity considerations.

5. Rental property

Investing in short- and long-term rental property is another attractive passive income idea, as there’s potential to generate significant income. But it often requires more work and expense than other strategies, involving tenants, property taxes, and building maintenance and repairs.

If you’d rather start small with generating rental income, you may consider renting high-priced items you already own. Peer-to-peer rental websites now allow individuals to rent out their vehicles, equipment and other physical assets (even parking spaces). However, you’ll want to account for your lost time in managing the leasing process, the wear and tear on your property and the possible tax implications if you ever wish to sell your rented property.

Learn more: What to know before buying a second home

Make passive income work for you

An Ameriprise financial advisor can help you better understand these strategies for passive income and determine how they may support your overall financial strategy.