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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
Related content
-
Original Medicare vs Medicare Advantage Quiz: Which is Right for You?Quiz Take this quick quiz to discover your "Medicare Personality Type" and learn whether you are a Traditionalist, or a Bundler.
-
Ask the Editor: Capital Gains and Tax PlanningAsk the Editor In this week's Ask the Editor Q&A, Joy Taylor answers questions on capital gains tax rates and end-of-year tax planning
-
Time Is Running Out to Make the Best Tax Moves for 2025Don't wait until January — investors, including those with a high net worth, can snag big tax savings for 2025 (and 2026) with these strategies.
-
Time Is Running Out to Make the Best Moves to Save on Your 2025 Taxes
Don't wait until January — investors, including those with a high net worth, can snag big tax savings for 2025 (and 2026) with these strategies.
-
4 Smart Ways Retirees Can Give More to Charity, From a Financial AdviserFor retirees, tax efficiency and charitable giving should go hand in hand. After all, why not maximize your gifts and minimize the amount that goes to the IRS?
-
I'm an Insurance Pro: If You Do One Boring Task Before the End of the Year, Make It This One (It Could Save You Thousands)Who wants to check insurance policies when there's fun to be had? Still, making sure everything is up to date (coverage and deductibles) can save you a ton.
-
Small Caps Hit a New High on Rate-Cut Hope: Stock Market TodayOdds for a December rate cut remain high after the latest batch of jobs data, which helped the Russell 2000 outperform today.
-
What Investors May Face in the New Year: InterviewKeith Lerner, the chief market strategist and chief investment officer for Truist Wealth, speaks with Kiplinger.
-
3 Year-End Tax Strategies for Retirees With $2 Million to $10 MillionTo avoid the OBBB messing up your whole tax strategy, get your Roth conversions and charitable bunching done by year's end.
-
'Politics' Is a Dirty Word for Some Financial Advisers: 3 Reasons This Financial Planner Vehemently DisagreesYour financial plan should be aligned with your values and your politics. If your adviser refuses to talk about them, it's time to go elsewhere.
-
For a Move Abroad, Choosing a Fiduciary Financial Planner Who Sees Both Sides of the Border Is CriticalWorking with a cross-border financial planner is essential to integrate tax, estate and visa considerations and avoid costly, unexpected liabilities.
