5 Smart Passive Income Investments to Quit Your Job!

Last Updated November 21, 2024 by Davina Kelly

You want to wake up whenever you want, spend more time with your family or travel without being tied to a 9 – 5. Passive income investments could make that your reality. 

Many people assume that working for money is the only way to earn income, but there’s another approach – making your money work for you. 

By investing in passive income streams, you can create a life where your money grows while you sleep, giving you the freedom to focus on what you want. 

In this post, I’ll cover five passive investment strategies that can help you quit your job and achieve financial freedom. 

And the best part is you don’t need a lot of money or special skills to get started. 

Please note the information in this post is not financial advice. I am just sharing my personal experience based on what I have learned after investing over the past five years. 

This post may contain affiliate links, which means we will receive a commission if you purchase through our links, at no extra cost to you. Please read full disclosure for more information.

 5 Best Passive Income Investments:

1. Dividend Stocks

Dividend stocks are one of the most straightforward and popular ways to generate passive income. When you buy a stock, you’re getting ownership in a real-life company that operates stores, employs workers and generates sales. 

Some of these companies are so profitable that, after covering their expenses and reinvesting in their business they have money left over to distribute to stakeholders like you. This is called a dividend. 

Dividends are typically paid out quarterly, which means four times a year you’ll receive a cash deposit in your account just for owning a piece of that company. 

Stable, well-established companies like Verizon, Proctor & Gamble and AT&T are known for paying reliable dividends, making them ideal choices for a dividend portfolio. 

How to Pick Good Dividend Stocks

When selecting dividend stocks, it’s crucial to focus on companies that have a history of being profitable and consistently paying dividends. 

Here are a few key things to consider when picking good dividend stocks:

Profitability: Look for companies with a track record of profitability, as this ensures they have the funds to continue paying dividends. 

Dividend History: Choose companies that have consistently paid dividends for several years without cutting or reducing them. 

Dividend Yield: This is a key metric that tells you how much dividend income you’ll receive relative to the stock price. You can calculate dividend yield by dividing the total dividend payout from the previous year by the current stock price.

For example, if AT&T pays quarterly dividends of $0.28, that totals $1.12 annually. If the stock is trading at $22.04 (current price at the time of writing this), the dividend yield is 5.4%. 

Watch Out for High Yields

A high dividend yield can look super appealing, but don’t be too quick to jump in – it can actually be a warning sign. Sometimes, a high yield happens because the company’s stock has dropped dramatically, which can mean the business is struggling. 

Take GameStop for example. It once offered a high dividend yield, but if you dug a little deeper, you’d see its traditional brick-and-mortar model was struggling to keep up with online retail growth. 

Always take time to check out the company’s financial health before investing – it’s worth the peace of mind.

You can start investing in dividend stocks with as little as $1,000 – or even less. Some platforms, like eToro and Trading 212, offer fractional shares, allowing you to buy a portion of a share. This makes dividend investing accessible to almost everyone. 

2. Dividend Index Funds 

If picking individual stocks feels daunting, you can opt for dividend index funds or ETFs (Exchange Traded Funds). This is a great starting point for newbie investors and is how I personally started making passive income investments. 

These funds pool together a variety of dividend-paying stocks, giving you built-in diversification – which is just a fancy way of saying your risk is spread across several companies. 

This way, if one company doesn’t perform well, your investment is still balanced out by the others which helps reduce the chance of losing money. 

Diversification is especially helpful for beginners because you won’t have to worry about individual companies’ ups and downs. For example, if Apple underperforms in a particular quarter, your investment is balanced out by the performance of other companies in the fund.

It’s like buying a whole box of chocolates instead of a single chocolate bar, ensuring that you still enjoy some returns even if one company struggles.  

How to Choose the Best Index Funds

When selecting a dividend index fund, keep the following in mind:

Expense Ratio: This is the management fee you’ll be charged for investing in the fund. It can range from 0.1% to 2%, so look for funds with low expense ratios. Over time, higher fees can eat into your returns.

Dividend Yield: Similar to individual stocks, you want a fund with a decent yield. Be wary of funds offering abnormally high yields as they may carry additional risks. 

Here are some examples of popular Dividend ETFs:

• Vanguard High Dividend Yield ETF (VYM) – Offers a dividend yield of around 2.89%.
• Schwab U.S. Dividend Equity ETF (SCHD) – Known for consistent dividend payouts and a strong track record.

Related. How to Invest in Index Funds (A Complete Beginners Guide)

3. Bonds

If you’re looking for more conservative passive income investments, bonds are a great choice. Bonds offer a steadier stream of income compared to stocks. 

When you buy a bond, you’re essentially lending money to a company, government or organisation and in return, you’ll receive regular interest payments. At the end of the bond’s term, you’ll get your initial investment (principal) back. 

When I first started investing, I avoided bonds completely simply because I didn’t understand them – but now, they’re a valuable part of my portfolio. So, hopefully, this information will help you avoid making the same mistake I did. 

The great thing about bonds is they offer predictable and stable returns which makes them a safer choice for risk-averse investors. 

The returns may not be as exciting as those from stocks, but bonds provide peace of mind because you know exactly what to expect in terms of interest payments and the return on your principal. 

Types of Bonds

There are many different types of bonds you can choose for your passive income investments. Here are some examples:

Corporate Bonds: You lend money to a company and they pay you interest. The safety of corporate bonds depends on the financial health of the company. Bonds are rated by agencies – anything rated A or B is considered relatively safe. 

Government Bonds: Lending money to a government is generally one of the safest investments, especially when it’s a stable government like the U.S. 

You can also invest in international government bonds or municipal bonds, which are issued by local governments and often come with tax advantages.   

Bond ETFs: If you want to diversify your bond investments, consider bond ETFs. These funds pool various bonds, giving you a mix of corporate, government and municipal bonds. 

One example is the Vanguard Total Bond Market ETF (BND), which offers exposure to a wide variety of bonds and provides monthly interest payments.

4. Real Estate Investment Funds (REITs)

Many people dream of investing in real estate but are intimidated by the high costs associated with down payments, property taxes and maintenance. 

Real Estate Investment Trusts (REITs) provide an accessible alternative. They allow you to invest in real estate without the hassle of managing properties. 

REITs are companies that own, operate or finance income-producing real estate. When you invest in a REIT, you’re buying shares of a portfolio of real estate holdings, which could include anything from office buildings and shopping malls to apartment complexes.

The great thing about REITs is that by law they must distribute at least 90% of their taxable income to shareholders in the form of dividends. So this makes them one of the best passive income investments. 

Types of REITs

Equity REITs: These REITs own and operate income-generating properties, collecting rent from tenants and paying it out to investors as dividends. 

Mortgage REITs (m REITs): These REITs lend money to property owners and earn income from the interest on the loans. mREITs tend to be riskier than equity REITs because they are more sensitive to interest rate changes. 

You can invest in REITs with as little as $1,000, making them an affordable way to diversify your portfolio. Some popular REITs include Realty Income (O), known as the “monthly dividend company” because it pays out dividends every month.

Read here to get a list of the best REITs that pay dividends regularly. 

5. High Yield Savings Accounts

If you’re looking for a secure and easily accessible way to earn passive income, a high-yield savings account is a great choice. While it’s not a traditional investment a high-yield savings account offers a reliable way to grow your savings with minimal risk – especially given current rates of around 4.5 % to 5%. 

These accounts are typically offered by online banks which avoid the costs of physical branches, allowing them to offer higher interest rates compared to traditional banks. 

Plus, they are FDIC insured and protected up to $250,000 per depositor, per bank, so even if the bank fails, your funds are secure. 

While high-yield savings accounts are stable and accessible, they won’t appreciate in value the way stocks or real estate might. Over the long term, other investments like dividend stocks or ETFs will earn higher returns. 

However, if you need a safe place to earn passive income without risking your principal, high-yield savings accounts are a great choice. 

High-yield savings accounts allow you to start small, build passive income gradually and reach your financial goals while keeping your money safe from market volatility. 

How to Choose the Best High-Yield Savings Accounts

When selecting a high-yield savings account, consider the following:

Interest rate: Different banks offer varying rates, so it’s worth comparing options to find the highest yield. I use this website all the time to compare interest rates. 

Fees: Look for accounts with no monthly fees or minimum balance requirements. This can help you maximise your earnings. 

Access to Funds: Ensure that you can easily transfer money in and out, whether through online banking or ATM access. 

Here are some of the best high-yield saving account options to consider:

• American Express National Bank  – Known for competitive rates and no monthly fees.
• Capital One – Offers a high interest rate with no monthly fees.
• CIT Bank – Provides a high yield with a relatively low minimum balance requirement.

Read here to learn more about these accounts and get more options to suit your needs. 

Practical Tips to Help You Get Started with Passive Income Investments

Investing may seem overwhelming at first, but these tips will help you build a portfolio that suits your goals and lifestyle. 

Establish an Emergency Fund

Before diving into the stock market or other investments, it’s crucial to establish a safety net. This step is essential and should be in place before you start investing. 

Aim to save at least 3-6 months’ worth of living expenses in a high-yield savings account.

Having this fund allows you to cover unexpected expenses without tapping into your investments, giving your portfolio time to grow uninterrupted.

Avoid touching this fund for anything other than emergencies—this is a financial cushion, not a vacation fund!

Related: How To Build an Emergency Fund Fast

Set Clear Financial Goals

Before you begin your passive income investments, identify your financial goals and timelines. 

• Short-term goals (0-3 years): Goals like building an emergency fund or saving for a car may be best suited to more stable investments.
• Medium-term goals (3-10 years): You may be comfortable taking on moderate risk for goals like buying a home.
• Long-term goals (10+ years): Retirement or children’s education goals can handle more market volatility since you’ll have more time to recover from market fluctuations.

Write down each goal, how much you’ll need and a target date. Clear goals provide direction and make it easier to stay motivated through inevitable market ups and downs. 

Understand the Basics of Risk and Diversification

Every investment carries some risk, so it’s crucial to understand the level of risk you’re comfortable with:

High-risk investments (e.g., stocks, options trading) offer high potential returns but can be volatile.

Low-risk investments (e.g., bonds, savings accounts) provide more stability but generally offer lower returns compared to stocks.

Diversification means spreading your investments across different assets (e.g. stocks, bonds, ETFs) to reduce risk. By diversifying, you can balance out losses in one area with gains in another, creating a more stable portfolio.

Start Small and Be Consistent

The key to successful investing is consistency. You don’t need a large sum to get started – small, regular contributions add up over time.

Dollar-cost averaging is a great strategy where you invest a fixed amount at regular intervals. This reduces the impact of market fluctuations because you’re buying more shares when prices are low and fewer when prices are high. 

This is a strategy that I personally use. It makes investing a lot easier and reduces the stress of trying to time the market. 

Automate contributions if possible. Many brokerage platforms let you set up recurring deposits which makes it easier to stay consistent. 

Educate Yourself Consistently

The world of investing is dynamic, so ongoing education is essential to make informed decisions. Here are some beginner-friendly resources:

Books: The Little Book of Common Sense Investing by John C Bogle (the father of index investing) and Rich Dad Poor Dad by Robert Kiyosaki are great starting points. 

YouTube channels: Look for channels with beginner content on investing basics. Nisha, Mamafurfur and Rose Han are great channels to check out. I’ve learned a lot from them myself.

Websites and courses: Platforms like Skillshare and sites like Investopedia offer courses and information covering everything from stock investing to personal finance.  

Investing in knowledge compounds over time, just like your portfolio. Set aside time each week to watch or read content that will help you grow as an investor. 

Stay Patient and Focus on the Long-term

It’s natural for new investors to check their portfolios frequently, but this can lead to stress and impulsive decisions. Instead, focus on long-term growth and avoid reacting emotionally to market swings. 

Keep a journal of your investments, including why you chose each asset. This helps to reinforce your decisions and reminds you of your strategy when the market gets bumpy. 

Final Thoughts on Passive Income Investments

Generating passive income through investments is one of the most effective ways to achieve financial freedom. I’ve shared many options in this post to fit your tolerance and investment goals. 

The key is to start small, be consistent and let your money work for you over time. With just $1,000 – or less you can begin building passive income streams that could eventually allow you to quit your job and enjoy the lifestyle of your dreams. 

This post was all about passive income investments.

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