Across the world, there is a growing movement of people seeking financial independence and early retirement that has propelled a fevered search for successful passive income ideas. 

These types of investors ultimately seek to retire long before traditional retirement ages. While this is no easy feat, it is also now quite common to hear stories of people that have already achieved this by applying smart passive investment strategies to supplement working salaries or incomes. 

If that sounds like you, then you can be qualified as a passive investor. 

Consequently, this desire for financial independence and early retirement would make you (whether you knew it or not) part of the rapidly growing Financial Independence Retire Early (FIRE) movement.   

However, we must say loud and clear that not everything that poses as a passive income idea is good for long-term wealth-building goals. 

Many so-called passive income ideas are actually get-rich-quick schemes that could potentially do more harm than good to your finances. These suspicious ideas should be avoided at all costs. 

In this article, we’ll discuss the pros and cons of 9 passive income ideas that have been proven to build a sturdy path to financial security and independence. 

We’ll organise these passive income ideas into two types — investment and non-investment strategies. 

The six investment passive income ideas we’ll cover are: 

1. Dividend Stocks
2. Real Estate Investment Trusts
3. Savings Accounts
4. Bonds
5. Certificate of Deposits
6. Automatic Investments

The three non-investment passive income ideas we’ll cover are:

1. Selling Digital Products
2. Dropshipping
3. Affiliate Marketing

But first, let’s review some common explanations of passive income. 

What is passive income?

Passive income is money you generate without doing a lot of “active” work to maintain the source of your earnings.

Most passive income ideas require some sort of effort to begin generating money. But after that initial effort, there is little to no daily work needed to continue earning from that income stream. 

It’s important to note that passive income ideas are not get-rich-quick schemes. Don’t confuse the passive income approach with online ads that sell the hope of becoming a millionaire overnight. 

Instead, what makes passive income ideas the most successful for investors is when they aim to produce a consistent long-term stream of income, rather than a high-risk hope of a windfall.  

As a further comparison, unlike a job or business enterprise that requires consistent daily effort to earn an income, the most successful passive income ideas have been proven to become a gift that keeps on giving — generating income streams for the long term. 

Why do you need a passive income?

There are various reasons for the current intense interest in generating passive income: 

• Financial Security: People may lose their jobs unexpectedly; businesses can fail. But passive income, when correctly set up, produces a consistent stream of earnings that can help provide a financial buffer during times of hardship. 

• Financial Independence: Financial independence, also known as financial freedom, is the condition when you no longer depend on a single or primary source of income for your livelihood. When you can meet your needs without your job or main business enterprise, you have achieved financial independence. 

Financial freedom has become a major aspiration in the global personal financial management community today, and generating passive income is considered a key ingredient to achieving it. 

“You become financially free when your passive income exceeds your expenses,” says T. Harv Eker, author of Secrets of the Millionaire Mind.

• Early Retirement: An offshoot of financial independence includes a movement that aims to retire early. To do this, you need to increase your retirement savings, and passive income provides an additional source of money that can support your retirement planning strategy. 

We believe Warren Buffett was right when he said, “if you don’t find a way to make money while you sleep, you will work until you die.” Developing a passive income stream helps you retire early so you don’t need to work until you die. 

So how can passive income help us achieve all of this? 

Below are 9 passive income ideas for you to consider. 

The 9 passive income ideas proven to help build your “future you”

1. Dividend Stocks

Put simply, there are two types of stocks: growth stocks and dividend stocks. 

Companies that issue growth stocks prefer to invest their retained earnings in the expansion of the business to grow the market price of their share.

On the other hand, companies that issue dividend stocks dedicate a percentage of their retained earnings to shareholders’ dividends. Dividend stocks aim to maintain or grow the dividend yield on their shares, paying out more money to their shareholders. 

When you buy a dividend stock, you will get consistent dividend income as long as the company keeps making a profit. 

Companies with dividend stocks pay dividends every quarter. By buying dividend stocks with good fundamentals, you can have a guaranteed source of quarterly income. 

Investors can also decide to reinvest these quarterly dividend payments in other assets (stocks, retirement accounts, etc.) or use them to meet expenses.

Pros of Dividend Stocks

One of the benefits of dividend stocks is that your ability to earn dividends depends on the company’s actions and activities. You don’t need to do anything to keep earning dividend payments as long as the company keeps performing well. 

Similarly, the dividend you earn can grow over time as the company increases its net income and distributes more money to shareholders. 

Cons of Dividend Stocks

However, what makes dividend stocks attractive is also a problem. If dividends can increase over time, they can also come down over time if the company’s performance deteriorates. 

The major problem, however, with purchasing dividend stocks is buying the right company. Investigating potential companies takes a lot of time and effort. Moreover, the time and effort expended does not guarantee you will get it right — and many do not!

Buying individual stocks is also risky since you are exposed to all the unsystematic risks that the company carries. When the company underperforms, you can lose your dividend income. If you decide to sell, you could incur high commission fees. 

Solution 

An excellent way to enjoy passive income from dividend stocks while minimising risk is to buy ETFs. Exchange-traded funds seek to reduce your risk exposure by diversifying investments by industry, economy, market capitalisation and more.

[Read more: What is an ETF: Learn About Investing in ETFs] 

2. REITs

Real Estate Investment Trusts (REITs) provide an exciting way to benefit from the potential in the real estate market without exposure to the risk of purchasing and managing an entire property. 

REITs invest in companies that buy and sell properties, as well as mortgage companies that finance real estate transactions. 

You can buy and sell REITs like you do stocks, and they pay a significant part of their income as dividends. 

Indeed, what makes REITs so popular today is the fact that many pay upward of 90% of their income as dividends, and their dividend payout ratio does not decrease irrespective of market performance. 

Dividend payments from REITs are an attractive and common way to earn consistent passive income.

Pros of REITs 

Instead of purchasing expensive properties (including all the additional management and interest fees), spending money to maintain it, and hoping you get renters to take it, you can instead invest in companies who take the burden of risk and earn from their income.

What makes REITs one of the most popular passive income ideas is the above-average dividend payout ratio that they offer. 

Cons of REITs

Like dividend stocks, purchasing the right REITs is a big challenge. While the dividend payout ratio is constant, when income decreases significantly, dividends will still fall irrespective of the constant dividend payout ratio. 

Solution

An excellent solution to this is to buy ETFs of REITs that diversify your investments and reduce your risk exposure. Vanguard Real Estate Index Fund ETF (VNQ) is a good example of an ETF that invests in REITs.  

3. Savings Accounts 

Earning interest on savings accounts is another way to earn passive income. A savings account is a deposit account in a bank that yields interest.

Savings accounts are easy to access, but they typically put a limit on how many times you can withdraw in a month. 

You can regularly withdraw the interest accumulated in your savings accounts for expenses or reinvestment in other assets. 

Pros of Savings Accounts

Savings accounts are considered to be a highly safe investment. It’s very rare for anyone to lose money placed in savings accounts.

As part of a larger long-term passive investment strategy, you can also use savings accounts to build an emergency fund that you can access when financial uncertainties arise. 

Cons of Savings Accounts

Savings accounts offer a much lower return rate compared to other investments like stocks, REITs, and bonds. 

Depending on the interest rate environment, the return on a savings account may fall short of the inflation rate (meaning the return is nominal). 

The top banks in the UAE have interest rates ranging from 0.25% to 2%. 

Solution  

You may be able to get a higher interest rate if you open savings accounts with some new online challenger banks. These banks have little to no overhead cost and can offer a higher rate of return to customers. 

4. Bonds

Bonds pay interest twice a year. When you purchase a bond, you will keep earning interest until the bond matures. The bi-annual interest can then be used as a source of additional income for personal expenses or reinvestment. 

Pros of Bonds

Bonds pay a fixed interest rate. A 4% yield on a bond will pay 4% interest on the bond until it matures.

They are considered more low-risk than stocks. Treasury bonds (offered by national governments) and municipal bonds (offered by local cities and government agencies) are even less risky than corporate bonds (offered by companies). 

Cons of Bonds

Unlike dividend stocks where you earn a dividend forever (unless the company repurchases the stock), bonds have maturity dates. Once it matures, passive income ceases. 

Also, while treasury and municipal bonds are usually highly secure assets, corporate bonds are open to default. Therefore, the passive investor needs to choose their bonds carefully.

Solution

To solve the first problem (no passive income after maturity), you can use the bond ladder system. In this approach, the investor purchases bonds that mature at different times so that when one bond matures, others keep paying interest. This way, the passive income never stops. 

To solve the second problem, buy bond ETFs. Bond ETFs lower your risk exposure through diversification. 

The good news is you can solve the two problems at once with ETFs. While aiming to diversify, ETFs naturally invest in different bonds maturing at different times, providing both diversification and consistent passive income at once. 

5. Certificates of Deposits

Certificates of Deposits, or CDs, are interest-earning fixed-deposit accounts. You can typically keep money in a CD for six months, one year, or two years. However, you can’t withdraw funds without penalty, until the CD matures.

Pros of CDs

They are as safe as savings accounts. However, though they offer the same safety level as savings accounts, they have a higher rate of return. 

Also, CDs offer a predictable source of income. You know the exact amount you will earn from your CD at maturity.  

Cons of CDs

The interest on certificates of deposit are typically similar to that of savings accounts. 

Also, the passive income you earn on a CD ends at maturity.

Solution

If the bank provides the option, you can reinvest your principal and interest in a new CD. You can also use the bond ladder system for CDs by buying CDs that mature at different periods. 

To acquire better earning potential, consider online investing platforms. 

6. Automating your investments

As mentioned above, buying individual stocks or bonds is not the best option for earning consistent passive income. This is because it exposes the investor to less-than-optimal risk.

Buying ETFs can help diversify your investments and reduce the risks associated with investing in the stock market. 

A proven method to maximise your passive income and minimise your risk is to learn the difference between the active and passive investing approach and quickly put it to work. 

Instead of buying and selling ETFs frequently, passive investors aim to build an investment portfolio that reflects their financial goals, automatically reinvesting all dividend earnings into that portfolio to maximise long-term gains. 

When you automate your investments, you then enable a regular stream of passive long-term income. 

This approach prevents the very possible yet avoidable flipside result — the nervous and erratic buying and selling of stocks that could ultimately make you broke. 

Since consistency is at the heart of passive income, passive income ideas that promote regular income generation over the long run should take priority in any smart investor strategy you build. 

Solution

A robo advisor is an excellent way to automate your investments. These online financial advisory platforms help investors create a portfolio that matches their financial situation, risk profile and ultimate goals. 

They are especially suitable for the information age because of their flexible services. 

Vanguard’s Mark Fitzgerlad, Head of Product Specialism, says that robo advisors offer “a more flexible, automated, cost-effective, cost-efficient method of delivering exposures quickly and easily. In that way, ETFs are the perfect components for them.”

This digital-first approach to investing also allows investors to automatically rebalance their portfolio, letting technology do the mathematical heavy lifting, as well as reinvest dividends. 

[Sarwa is a robo advisor that helps investors maximise their returns and minimise risk through diversified portfolios and smart investment technology. These portfolios include popular passive investment approaches such as ETFs of stocks, bonds, and REITs in investors’ portfolios.]

Now, after considering six passive income ideas relating to investment products, let’s consider other unusual passive income ideas not directly related to investing. 

1. Sell Digital Products

Digital products include books, courses, music, photos, infographics, etc. Once created, a digital product will keep generating income for as long as it is relevant. All you need do is update it when necessary to keep the information it provides fresh. 

Bloggers and online marketers make money packaging and selling such digital informational products. How does it work? 

• Identify your area of expertise 
• Build a community of people who need that expertise
• Offer free information to develop trust
• Create a digital product that offers premium content
• Sell
• Repeat

Pros of Digital Products

If you have the right expertise and knowledge and you see a need in the market for it, you can consider a next step. Once you create the product, you can sell the same product (perhaps with little update) for many years to come. 

Also, we live in an age where information is a priced commodity. Therefore, it’s safe to say that this market is on a growth trajectory.

Cons of Digital Products

It takes time to build an audience and develop a digital product that the audience will love. 

The competition in the informational product is rising. You need to bring your A-game to everything, from audience building to product creation. 

Solution

Devote time to building a loyal audience that trusts and values you. You can also consider outsourcing product creation.

2. Dropshipping

Dropshipping is a system of commerce where you serve as an intermediary between the seller and the buyer without stocking the seller’s products. 

A dropshipper looks for buyers and sends the request to the seller who processes the sale.

The dropshipper only needs to set up a system for acquiring customers and automate the process of sending those orders to the seller. As the orders come, the dropshipper keeps earning. 

Pros of Dropshipping

The dropshipper takes on little risk by not taking stock of the products. 

Cons of Dropshipping

Setting up a dropshipping site is difficult and requires various automation.

Getting a consistent flow of buyers is a challenge.

Solution

Invest in top-notch website design and perfect your marketing strategy.

3. Affiliate Marketing

By marketing another company’s products and/or services, you can earn commissions in what is known as affiliate marketing. Once you set up a successful affiliate marketing strategy, it can become a low-maintenance channel to earn passive income.

There are many ways to go about affiliate marketing, but the bottom line is to choose the right products (products that align with your identity and interests), select a good traffic generation strategy (content or ads), write compelling sales pages, and watch the income flow in.

Popular affiliate platforms include Commission Junction, Share a Sale, ClickBank, Amazon Associates, eBay Partner Network, etc. You can also become an affiliate of individual companies without registering on these platforms.  

Pros of Affiliate Marketing

You can start big or small. If you have the cash, you can invest in ads; if you don’t have as much money, you can learn content marketing and take the long road.

Cons of Affiliate Marketing

Generating traffic to a website can be very hard, whether with ads or content.

More importantly, some so-called affiliate marketing opportunities are pyramid schemes in disguise. Many people do confuse these schemes with legitimate affiliate marketing programs and end up getting their fingers burnt. 

Solution

Devote time to learning SEO, Content Marketing, and Ads Creation and Management.

Know the differences between affiliate marketing and pyramid schemes. Also check out other scams that disguise as affiliate marketing.

Putting passive income ideas into action

Next, it’s time to select which set of strategies will best suit your financial goals. 

However, it might be challenging to know which ideas will best fit your unique financial profile and lifestyle, as well as how to go about putting them into action. 

We’ve learned that REITs and stocks generate the highest returns but with the highest risk. Meanwhile, savings accounts and CDs have low interest, but they are safe and liquid (easy to access). 

For these reasons, smart passive investors today tend to choose to buy ETFs of REITs, stocks, and bonds instead of buying them individually. 

Using a robo advisor like Sarwa to plan your investments in these ETFs will lower your risk and automate your investments (and dividend reinvestments) to create a consistent passive income stream over the long-term. 

Takeaways

• Generating passive income is essential for those who desire financial security, financial freedom, and early retirement.
• We have considered 10 passive income ideas that will help you attain that goal. The first six are investment products that will help you grow your money while you sleep:  this includes buying dividend stocks, REITs, savings accounts, bonds, CDs, and automating your investments.
• The other passive income ideas (that are not investment products) include strategies such as selling digital products, dropshipping, renting out your home, and making money with your car.
• While many of these ideas have their cons, they also have their pros. Your task is to find a way to make the best use of the passive income strategy that suits your risk profile and long-term investment goals.