What Are Passive Income Strategies and How Can I Use Them in 2025?

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published 18 January 2025

Something these inflationary times have clarified is that we could all use a little more money in our bank accounts. It's a simple fact: Life has become much more expensive.

Passive income is a way to generate extra money and overcome a hurdle that's getting higher and higher without knocking yourself out.

"Passive income is money you earn without actively working for it — as opposed to earned income from a job. In general, passive income comes from putting something you own — property, money or expertise — to work. The revenue you collect in rent, dividends or ad sales are all forms of passive income," explains SmartAsset.com.

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At the outset of 2025, it's a good time to identify and consider passive income strategies for the year ahead.

Here are five common and easily implemented passive income strategies.

Dividend investing

People have been investing in dividend-paying stocks since the Dutch East India Company paid a "spice" dividend in 1610. The VOC – the acronym for its native-language name, the Vereenigde Oostindische Compagnie – switched to a cash dividend two years later.

Investors have been obsessed with dividends ever since.

The S&P 500 Dividend Aristocrats Index includes U.S. companies that have increased their annual dividend for at least 25 consecutive years. In other words, these are Wall Street's best dividend stocks for dependable dividend growth.

And, as S&P Dow Jones Indices notes in a research paper, "The ability to increase dividends for 25 consecutive years does not come at the expense of lower yield. The S&P 500 Dividend Aristocrats has consistently delivered higher yields than its benchmark, the S&P 500, with yields usually in the range of 2.0%-2.9%."

Indeed, between January 1998 and January 2023, the average dividend yield for the S&P 500 Dividend Aristocrats was 2.5%, 70 basis points higher than the S&P 500.

According to S&P Dow Jones, since 1926 dividends have contributed approximately 32% of total return for the S&P 500 since 1926 compared to 68% for capital appreciation.

"Therefore," the authors conclude, "sustainable dividend income and capital appreciation potential are important factors for total return expectations."

Dividends are the most passive way to generate income and capital gains without lifting a finger.

Options trading

Options are a potentially attractive way to generate passive income, but many folks may not know what options are or how to use them. Investors familiar with dividend-paying stocks will probably appreciate the fact that options involve a higher level of risk than merely buy-and-hold equity ownership.

There are two types of options. A call option is a contract that gives you the right to buy a stock at a specific price for a particular period. And a put option is a contract that gives you the right to sell a stock at a certain strike price for a defined period.

Options investors use covered call and short put strategies to generate passive income. A covered call occurs when you already own shares of a stock and sell a call on that stock to generate option income. A short put involves selling a put for premium income.

The most significant risk of these strategies is that you might be forced to sell your shares (covered call) before you're ready or buy shares (short put) when you only want passive income.

Real estate

There are two kinds of real estate investing: passive and active.

Passive real estate investing is the defining feature of real estate investment trusts, or REIT stocks. REITs invest in the acquisition and development of real estate as well as activities such as equity and debt real estate crowdfunding.

Active real estate investing generally comprises two activities: buying and renting out real estate properties to generate positive cash flow; and running general partnerships that invest and manage limited partnership capital raised from limited partners to invest in real estate.

Investing in REITs such as Equity Residential (EQR), one of the largest multi-family residential REITs in the U.S. with a $26 billion market cap, is as easy as grabbing your phone and buying a few shares. It currently pays out $39 in dividends for every $1,000 in shares held.

Conversely, active investing requires a much greater time commitment, even if you outsource every aspect of the real estate operation.

High-yield savings accounts

The federal funds rate is the rate banks charge each other for short-term, overnight loans to meet their reserve requirements. This rate is the basis for what banks charge for different loans, such as the prime rate, which is generally three percentage points higher than the federal funds rate.

Due to rising inflation, the Fed began raising the federal funds rate in March 2022. By July 2023, the federal funds rate had reached 5.25% to 5.50%. The move prompted Americans to allocate savings to high-yield savings accounts and other high-yield savings products.

By September 2024 the Fed had seen enough progress in its effort to tame inflation to start cutting the federal funds rate, announcing an initial 50 basis-point cut and following up with 25-basis-point cuts in November and December.

The Fed appears to be on hold for now, assessing incoming data as well as new trade and tax policies sure to come following President-elect Donald J. Trump's January 20 re-inauguration.

In April, Kiplinger contributor Kelly Lavigne pointed out that 57% of Americans keep more money in high-yield savings accounts or money market funds because of interest rates.

Peer-to-peer lending

Peer-to-peer lending platforms can be a way for people with spare cash to generate passive income in 2025. One of the largest peer-to-peer platforms in the U.S. is Prosper, which has provided more than $26 billion in loans over two decades in business.

Prosper offers loans between $2,000 and $50,000. According to its website, the average annual return for investors in loans Prosper originated from July 1, 2009, through June 30, 2024, was 5.5%. Most of the loans made by Prosper through its marketplace last two to five years.

The biggest downside of peer-to-peer lending platforms like Prosper is the high fees. For example, investors are charged an annual servicing fee of 1% of the outstanding balance of the borrower loan.

You should consider whether peer-to-peer lending is right for your passive income strategies in 2025. It's not for everyone.

Will has written professionally for investment and finance publications in both the U.S. and Canada since 2004. A native of Toronto, Canada, his sole objective is to help people become better and more informed investors. Fascinated by how companies make money, he's a keen student of business history. Married and now living in Halifax, Nova Scotia, he's also got an interest in equity and debt crowdfunding.