Best Passive Income Investments (Including Dividend Stocks)

Are dividend stocks passive income kings? Yes! However, there are a few other types of investments that might fit your needs as well, in addition to dividend investing. Let's take a look at a few different options for passive investment besides dividend stocks.

We'll walk through different types of passive investment options, go over the highest-paying passive investment opportunities, how to get started with passive income investments, and more. 

Finally, at the very end of this piece, you'll be able to determine whether dividend stocks make the most sense for passive income investing.

Types of Passive Investment Options

Let's take a look at several options for passive income, including dividend stocks. We'll also look into real estate investing and index funds as a comparison tool.

Dividend Stocks

When you buy shares of companies that pay dividends, this means that you invest in order to receive a dividend payout at regular intervals, typically annually, quarterly or even monthly. 

Here's a quick overview of how a dividend stock works. Imagine that you buy 100 shares of a stock at 50 cents per dividend from a particular company. This means you'd receive $50 in dividends from that company in a year.

Why do companies pay dividends, anyway? They do so because they want to share earnings with their investors and encourage them to continue to invest in the company’s stock.

You can do a wide range of things with your dividends such as:

• Invest in a dividend reinvestment plan (DRIP): A dividend reinvestment plan (DRIP) means that you can reinvest a stock's cash dividends into additional shares of the company's stock.

• Invest in another type of investment: You can choose to invest in another investment entirely. For example, if you want to invest in your cousin's emu farm, you can use your dividends to do so.

• Spend the money: If you'd rather live off the money you invest, you can do that instead.

If you think you're in line to get a dividend from a company, it depends on when you buy it. You must buy shares of a particular stock by the ex-dividend date, also called the ex-date. If you own even one share of stock by the ex-date, you’ll qualify to receive the payment. However, if you buy after the ex-date, you won’t receive dividend payments. Companies will also announce the payment date, which is the date that shareholders will receive payment by companies.

Real Estate

Some popular methods of passive investment regarding real estate include crowdfunding, REITs, real estate funds or remote ownership.

• Crowdfunding: Crowdfunding means you pool your resources to invest in a larger investment using platforms that allow a multitude of users to pool funds and invest in mortgage loans directly.
• Real estate investment trusts (REITs): REITs invest in different types of real estate, such as commercial properties and pay profits out as shareholder dividends annually. REITs are usually publicly traded, just like stocks. REITs may not grow or appreciate value as much as other investments.
• Real estate funds: Real estate funds are a type of mutual fund that invests in public real estate securities, which offer more diversified, long-term, appreciating investments than REITs.
• Remote property ownership: Remote ownership means that you own an investment property but allow an on-site property manager to take care of the day-to-day needs of the property. Doing so can help you take advantage of ownership in higher-demand areas, even if they are far away, though it can be risky because you rely on others to tell you what's going on in the property.

Index Funds

Index investing is one of the most common forms of passive investing. In this type of investment, investors track, or follow, a market index or indices. You'll invest in a diversified group of funds that seek to track that particular index, such as the S&P 500. They tend to be cheaper, less complex and offer results with minimal effort.

Are these the only types of passive investment options? Not at all. For example, peer-to-peer lending, which is the practice of lending money to individuals or businesses through online services that match lenders to borrowers, may also work in your favor.

How to Choose a Passive Income Investment Strategy

Which type of passive income investment works best for you? Does dividend investing work for you or do you want to consider investing in REITs instead?

Step 1: Outline your goals. 

Before you make investing decisions, consider your financial goals. Do you know what you want your investments to do for you? It's a good idea to consider all the aspects of your finances, whether you want to retire with $2 million or if you want to receive recurring income right now. 

Step 2: Determine your risk tolerance.

Your risk tolerance refers to the amount of risk you're willing to assume when you invest. For example, you'll encounter more risk when you invest in individual stocks compared to investing in bonds. Investing in individual stocks doesn't guarantee any returns, while bonds guarantee some level of returns. Stocks depend on a company's performance as well as general market conditions, while bonds are dependent on interest rate movements.

It's a good idea to research different investment types in order to determine whether they offer the right type of projected returns for your needs. For example, if you have a long-term investing horizon, you may want to consider the types of investments that align with your needs. For example, investing in a short-term CD doesn't make the most sense for your retirement investing needs. Instead, you likely want to invest in asset categories that offer greater risk for greater returns, like stocks. This can help you escape inflation, which erodes the amount of goods and services you can buy over time. 

Step 3: Consider a mix of diversified investments. 

It's a good idea to consider a wide variety of diversified options, including stocks, bonds and cash assets because market conditions don't always have the same effect on the same types of investments. This reduces risk in your portfolio because if one investment goes down, you can mitigate losses with the other investments that you have in another asset category. 

Asset allocation can help you have a fighting shot at meeting your financial goals. Just don't put all your eggs in one basket. You want to make sure you diversify as much as possible to limit losses and lessen the fluctuations of the stock market. This may mean that you invest in dividends, real estate, and index funds as part of a diversified portfolio.

Step 4: Consider dollar-cost averaging and rebalancing.

Add new money to your investment over a long period of time using dollar-cost averaging. This means you invest the same amount of money every time, which means you buy more of a particular investment when the price is low and you buy less when the price is high. Rebalancing means that you bring your money back to its original asset allocation mix by realigning your asset weighting in your portfolio by periodically buying or selling assets. You can rebalance your portfolio based either on the calendar (such as every six or 12 months) or based on your investments.

Step 5: Monitor your portfolio. 

Once you've made your investment choices, determine the amount of money you want to invest and allow your money to start working for you. You may need to open a brokerage account in such a case in order to transact and hold your investments. Check out your portfolio every so often and consider whether the investments you've made continue to live up to the strategies you initially envisioned for your portfolio. Don't flip those monthly or quarterly investment reports into your computer trash when you get them!

What is the Highest Paying Passive Income Investment?

Passive income investments allow you to make money by putting your money to work using a tried-and-true method. So, what is the best passive investment strategy, and which one pays out more money? Of all the asset classes, real estate and dividend-paying stocks tend to outperform other asset classes.  

Learn more: Dividend Stocks for Income

Consider Dividend Investments

Seriously consider investing in dividends for a passive income investment approach. Consider not chasing high dividend yields, however, because they could be high for a reason. You can divide a stock’s total annual dividend payouts by its current share price. In addition, assess the payout ratio by dividing dividends per share by earnings per share to find out how much of a company’s earnings are going toward the dividend. 

In addition to that, consider how high levels of debt can affect the company and its dividend. Look for companies that not only pay steady dividends but also increase them at regular intervals.  

Before you determine a passive investment option, figure out what exactly you want — stable, immediate income or a payoff during the time in your life when you need it most, such as during retirement.

Which option works best for you?

Learn more: Are Dividend Stocks Worth It?

About Melissa Brock

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Experience

Melissa Brock worked as an associate editor & contributing writer for DividendStocks.com from 2021 to 2024.

She currently works as a full-time freelance writer and financial editor covering higher education, investing, personal finance, mortgages, college savings, insurance, and more. 

Areas of Expertise

Dividend Stocks, Retirement

Education

Bachelor of Arts in Communication Studies, Central College, Pella, Iowa

Past Experience

Melissa graduated summa cum laude with a bachelor of arts in communication studies with minors in psychology and Spanish from Central College. She's a longtime member of the National Association of College Admission Counseling (NACAC). While working in college admission, Melissa Brock pursued a freelance writing and editing career.