Five ways for investors to earn passive income

Combining multiple channels of passive income can provide an ideal complement to your actively management portfolio

Five ways for investors to earn passive income

What’s not to like? Making money with minimal effort and learning how to make it work for you beyond just putting extra aside each month is an excellent complement to an actively managed portfolio.

Here’s a look at a number of examples of easily acquired passive income.

1, Open a high-interest savings account

Traditional banks stopped paying worthwhile returns on savings accounts a long time ago, so maybe it’s time to consider moving money into an online bank that pays interest exceeding inflation.

This is not a way to get rich – 1-2% won’t get you a sports car – but they are low-risk and great for emergency funds or conservative income sources in retirement.

If you have your high-interest savings account in a non-registered account (outside of a TFSA or an RRSP), the interest income will be taxed at your marginal rate.

2, Dividend income

Dividends are a portion of a company’s earnings paid out to shareholders on a quarterly or sometimes monthly basis. Many long-term dividend-paying companies have been paying dividends to shareholders for decades. In addition to that, many companies continue to raise dividends, often greater than the pace of inflation.

For example, if a company is trading for $100 and their dividend yield is 4%. That means that they pay out $4 annually, or $1 every quarter of the year. If you buy 100 shares of the $100 company, for a total of $10,000, every year you will get $400, and every quarter of the year, you will receive $100. 

This could, of course, increase if the company grows, outperforms the market and raises its dividend. Be warned, companies can also cut their dividend, so diversification is important.

In Canada, dividend income from Canadian corporations is taxed at a preferential rate. 

3, Rental distributions through REITs

Real Estate Investment Trusts (REITs) are companies that own at least 75% of their assets in real estate and receive rental income. They distribute the rental income received to their shareholders. 

You can also decrease your risk from buying an individual REIT company by buying a REIT ETF.  They are not without risk, of course - REIT prices can fluctuate according to interest rate moves and can be influence, naturally, by the state of the housing market.

According to Investopedia, REIT returns and interest rates have for the most part had a positive correlation, moving in the same direction. This is evidenced primarily between 2001-2004 and 2008-2013. The periods of inverse correlation, right after 2004, 2013, and 2016, all relate to Fed monetary tightening policies, reversing the actions of monetary stimulus actions that were put into place mainly after recessions. Here, interest rates rose but REIT values decreased.

4, Be a landlord

You can purchase a house and rent it out – or the basement - to tenants. They pay you a monthly rent that covers the monthly mortgage payments and also provides some cash flow.

In an ideal scenario i.e. with good tenants and the right location, you simply pocket the extra income and after the property is paid for, it continues to generate income.

Of course, becoming a landlord comes with its own problems. Tenants can be a real pain and maintenance is required. Many bypass the day-to-day operation by using property managers.

5, DIY investing

The S&P 500 is up almost 14% year to date – do you want to miss out on this growth? Capital appreciation means that the money you invested with (your capital) appreciates through the growth of businesses through the increase in price of stocks.

This is not for everyone as many can’t stomach huge losses (such as the 2008 losses of 37%) in their portfolio. However, if you held on or invested more after the loss in 2008, you would have already recovered your portfolio and then some.

Read more: How passive income can help you build your wealth

The best approach is to simply invest in the index (for example, the S&P 500) through exchange-traded funds. Some exchange-traded funds seek to track certain indices and can be traded like a stock, but they are actually an index (a huge basket of stocks).