Story by Becca Stanek, The Week US

Examples of passive income include dividends earned from stocks, income from a rental property and royalties from an e-book you published© Illustrated / Getty Images / Shutterstock

Making money without even trying might sound too good to be true — but there are ways to do it. Unlike the “active” income you earn from, say, your 9-to-5 job, “passive” income is a stream of cash that flows without regular work on your part. 

But before you jump in and start buying up apartments to rent or dividend stocks, it’s important to understand everything that passive income entails. Some sources are more passive than others, and there are tax implications to consider.

Passive income is money you make “without a large amount of additional work added to your day-to-day routine,” said Kiplinger. Examples of passive income include dividends earned from stocks, income from a rental property and royalties from an e-book you published. 

The aim of passive income is to generate an additional source of income alongside the money you’re bringing in from your job and other places. Doing so can “help you to grow your savings and increase cash flow,” Kiplinger said.

What to know before setting up a passive income stream

You’ll want to start by being realistic about how much time, effort and money you want to sink into your passive income project. 

Typically, you will need “startup capital” to get your passive income endeavors off the ground, said Investopedia. “To develop a meaningful passive income stream from financial assets like cash-equivalents, stocks and bonds, you’ll need a decent account balance.” That said, there are some passive income streams that require a type of initial investment that isn’t necessarily monetary, such as talent or time.

When determining which passive income stream is a good fit for you, it is also helpful to assess what skillsets you already have. Do you already have experience with investing? Do you know how to create online content or courses? By zeroing in an area in which you already have some knowledge and experience, you can cut down on the time involved. 

But regardless of your familiarity with your chosen income stream, you’ll likely need to put in some time at the outset to get the ball rolling. The amount of time involved will vary depending on your chosen method. For instance, opening a high-yield savings account or a certificate of deposit (CD) only takes a bit of research up front, plus some time invested in opening the account. Real estate investing, meanwhile, can be far from passive.

It’s also important to realistically assess the risk involved. Some passive income endeavors are riskier than others, and you’ll want to ensure you are only taking on as much risk as you’re comfortable with. For example, if you create a course that flops, your only loss would be the time it took for you to make it. But if you buy a potential rental property that ends up needing extensive repairs, that presents a much higher level of financial risk.

And last but certainly not least, you will want to factor taxes into the equation. Usually “net income from passive income investments is reported as ordinary income,” said Good Financial Cents, with the exception of capital gains income. 

4 passive income ideas to consider

Now that you’ve read up on the basics of passive income, you can start thinking of some ways to earn it. Here are four of the most reliable sources of passive income.

Dividend investments

This can include dividend stocks as well as dividend index funds and exchange-traded funds (ETFs). In either case, you’ll get a regular payout of a portion of a company’s profits. However, income is not guaranteed; companies may have to decrease dividends or could become unable to pay them.

To get started, you’ll need to open a brokerage account. Also note that “you likely will have to tie up thousands, if not tens or hundreds of thousands, of dollars to earn significant income from dividend stocks,” said Forbes.

Bonds and bond index funds

Bonds allow investors to lend money to companies, as opposed to taking an ownership stake like they would when investing in stocks. Investors will then earn interest income.

For those who are more risk-averse, such as individuals approaching retirement, bonds can be a safer bet “because of their lower volatility and relative safety compared to stocks,” said NerdWallet. However, they will also “generally earn a lower return on your investment.” 

High-yield savings accounts or CDs

The trick to making investing in a high-yield CD or savings account a solid stream of passive income is to search for the top rates. Often, you’ll find those at online banks.

Plus, said Bankrate, “investing in a CD or savings account is about as safe a return as you can find.” The downside is that returns might not be as impressive.

REITs

While your initial instinct might be to invest in physical real estate to generate investment income, that can come with a lot of headaches and more time investment than you may want. An alternative way to earn passive income through real estate is by investing in a real estate investment trust (REIT).

REITs “own and manage income-producing properties and distribute the profits to investors,” said Good Financial Cents. In some cases, you may need to be an accredited investor, though other platforms make real estate investing more accessible.

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You may not have enough funds to follow WB and have a meaningful stake in Coca Cola but if what if we use LWDB as the working example, this time without dividends re-invested.

If you bought at 182p, six years later you are back to the beginning, thankfully you have dividends to re-invest, wherever you think best, it could be back into LWDB as the price fell.

Your buying yield was 3.4%, which has risen to a buying yield of 17.5% on 2k capital

If you bought 1098 shares for 2k, they would be worth today £9,936.00 plus dividends or £14,087 including dividends.

The current dividend is 32p so on the current value of £9,936.00 a running yield of 3.5% (1098 shares at 32p = £351.36)

If you intend to retire on your dividend stream, you could always re-invest part in higher yielding Trusts.

Compounding is ‘the eighth wonder of the world’: How to unleash its awesome saving and investing power

Story by Tom Stevenson

Albert Einstein called compounding the eighth wonder of the world. The famous economist John Maynard Keynes marvelled at ‘the awesome power of compound interest’.

Compounding is the addition, repeatedly, of interest to the principal of a deposit or a loan. It describes what happens when you earn interest on both the money you have initially put aside plus the interest you have already earned on that starting amount. Here’s how it works.

Imagine you save £100 in a bank account and you earn 10 per cent interest on that money (I know, it’s been many years since this has actually happened but bear with the illustration).

After one year your account will hold £110 (£10 of interest plus £100 capital, or 0.1 x 100 = £10 + £100).

Start saving young: Are you Prudence or Extravaganza when it comes to handling your finances? Find out below…

Now imagine that you leave the accumulated capital in the account and it again earns 10 per cent interest. By the end of the second year you will have £121 (£11 of interest plus £110 of starting capital, or 0.1 x 110 = £11 + £110).

See how the amount of interest grows because the same percentage is applied to a greater starting amount.

Do this year after year for, say, 20 or 30 years and something magical happens. 

The numbers start to grow exponentially so that after a while the amount of interest you earn begins to dwarf the initial amount that you were able to save. The important factor here is time. It is the key component of compounding and the reason why everyone should start to save as soon as they can – preferably several years ago!

Tom Stevenson 

Tom Stevenson is investment director at Fidelity International. 

The tale of Prudence and Extravaganza

I like to tell the story of two sisters. One starts putting aside a modest amount when she is just 18 years old. 

She’s called Prudence, obviously. Saving £20 a week gives her £1,000 a year.

By the time Prudence is 38 she has accumulated £63,000 and now the extra £1,000 a year of saving starts to become irrelevant. 

What matters now is the compounding of the 10 per cent growth and interest on the ever rising amount of her savings. By the time she is 60, she has accumulated a little over £500,000 even if she stops saving completely at the age of 38.

Now Prudence’s sister (I call her Extravaganza for obvious reasons) laughs at her careful sister and spends the 20 years from 18 to 38 enjoying herself and spending all her money. She’s not alone; for most of us there are plenty of other calls on our money in our 20s and 30s.

But aged 38 she sees how much Prudence has put aside and she thinks she would like to match her. She too starts saving £20 a week and earns the same 10 per cent as her sister.

But here’s the rub. Because she starts later and doesn’t benefit from the miraculous ingredient of time, she never catches her sister up. 

When they are both 60, Extravaganza has accumulated just £80,000 compared with her sister’s half a million. And with every year that passes their fortunes diverge even further. (See how the sisters’ fortunes diverge in more detail below.)

Use our compound saving and investing calculator 

It’s helpful to learn how to work out compound interest for yourself. But once you’ve grasped the essentials, there’s no need to go through this laborious process every time, writes This is Money. 

Our monthly and lump sum saving and investing calculator does the task for you.

Our calculator assumes interest is calculated and compounded monthly.

But you can find other online calculators that do it annually, as in the example above. 

The rule of 72

So compounding is a powerful force. How do you work out how it might work for you ? Fortunately, there is a very simple rule of thumb to help you calculate compound interest. It’s called the Rule of 72. This is how it works.

Take the interest rate you expect to earn and divide it into 72 – the answer is the number of years it will take you to double your money. So at 6 per cent a year it will take you 12 years to double your money. A 3 per cent return will take 24 years. At 12 per cent it will only take six years.

One last point. Compounding works in reverse too. If rather than applying an interest rate to a deposit you are applying compound interest to a loan without either paying down the capital or servicing the interest, the amount outstanding will grow and grow.

Prudence and Extravaganza: How much will each have to retire on? 

Even though Prudence saves for 20 years and Extravanganza for 30, Prudence still ends up with considerably more by the time they reach the age of 68 

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Albert Einstein called compounding the eighth wonder of the world, or he didn’t.

Warren Buffett Could Make Over $3 Billion in Dividend Income in 2025 From These 5 Stocks

By Keith Speights – Jan 25, 2025

Key Points

• Berkshire’s top income producers this year will almost certainly be Bank of America, Coca-Cola, and Chevron.
• American Express and Apple should also generate significant dividend income for Buffett’s company.

Chevron

The late Senator Everett Dirksen once reportedly said, “A billion here, a billion there, and pretty soon you’re talking about real money.” With that quote in mind, Warren Buffett’s dividend income this year will be real money.

Technically, the dividend income will belong to Berkshire Hathaway. But for many, Buffett and Berkshire are practically synonymous. And they could make over $3 billion in dividend income in 2025 from these five stocks.

Bank of America

Buffett seems to have soured somewhat on Bank of America (BAC 1.34%). He significantly reduced Berkshire’s stake in the big bank last year. However, Bank of America (BofA) still contributes a lot of cash to the conglomerate’s coffers.

NYSE: BAC

Bank of America

As of Sept. 30, 2024, Berkshire owned 766,305,462 shares of BofA. With the company’s forward dividend of $1.04, that translates to nearly $797 million in dividend income this year. Of course, if Buffett sells more of this stock, the amount of dividends received will be lower.

2. The Coca-Cola Company

The Coca-Cola Company (KO 0.38%) is one of Buffett’s “forever stocks.” He’s held it the longest of any other stock in Berkshire’s portfolio. In his 2022 letter to Berkshire Hathaway shareholders, Buffett wrote, “The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million.” That total should be even greater this year.

Berkshire has owned 400 million shares of Coca-Cola for a long time. Coke pays a forward dividend of $1.94. If Buffett doesn’t sell any shares (which seems to be a safe assumption), Berkshire will rake in at least $776 million in dividend income from the big food and beverage company this year. The amount will likely be higher, though. Coca-Cola is a Dividend King with 62 consecutive years of dividend increases. I fully expect the company will keep that streak going in 2025.

3. Chevron

Chevron (CVX -0.71%) is a more recent addition to Berkshire’s portfolio. Buffett initiated a stake in the giant oil and gas producer in 2020 when its shares were beaten down due to the impact of the COVID-19 pandemic.

NYSE: CVX

Chevron

Berkshire owned 118,610,534 shares of Chevron at the end of the third quarter of 2024. With the company’s dividend of $6.52, the conglomerate should make at least $773.3 million in dividend income this year. Again, though, the actual total will likely be higher. Chevron has increased its dividend for 37 consecutive years and could boost its payout soon.

4. American Express

Buffett wrote to Berkshire Hathaway shareholders last year that American Express (AXP -0.12%) would “almost certainly” increase its dividends in 2024 by around 16%. He was close. Amex increased its dividend payout by nearly 17%.

The legendary investor also wrote that Berkshire would “most certainly leave our holdings untouched throughout the year.” I suspect it will do the same in 2025. If so, Berkshire’s 151,610,700 shares of American Express with the financial services company’s dividend of $2.80 will add up to at least $424.5 million in dividend income this year.

5. Apple

Apple (AAPL 0.32%) isn’t the apple of Buffett’s eye that it once was. His position in the consumer tech giant is much lower now than it was a couple of years ago. However, Apple remains Berkshire’s largest holding. It’s also still an important source of dividend income.

NASDAQ: AAPL

Apple

The math with Apple is easy. Berkshire owned 300 million shares as of Sept. 30, 2024. With a dividend of $1 per share, that translates to $300 million in dividend income for Buffett and his company in 2025. This amount will change if Apple increases its dividend (which is likely) or Buffett sells more of the stock (which could happen).

Which is the best stock of the five for income investors?

The expected dividend income for Buffett and Berkshire from these five stocks in 2025 totals $3.07 billion. Which is the best pick for income investors?

I think income investors who aren’t billionaires will find several of Buffett’s major income producers attractive picks. Coca-Cola offers an especially impressive dividend track record along with a solid forward dividend yield of 3.14%.

However, my vote goes to Chevron as the best stock of the five for income investors. The oil and gas company has the highest dividend yield of the group (4.17%). It has also reliably increased its dividend.

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Remember compounding dividends takes a while to start to build but the sooner you start the nearer you will be to your finish.

The Renewables Infrastructure Group Limited

Interim Dividend

The Renewables Infrastructure Group Limited (the “Company”) is pleased to announce the fourth quarterly interim dividend in respect of the three month period to 31 December 2024 of 1.8675 pence per ordinary share (the “Q4 Dividend”).  The shares will go ex-dividend on 13 February 2025 and the Q4 Dividend will be paid on 31 March 2025 to shareholders on the register as at the close of business on 14 February 2025.

In accordance with the terms and conditions of the Scrip Dividend Alternative and the Directors’ power to cancel the Scrip Dividend Alternative where a change in market conditions might, in the reasonable opinion of the Directors, render the Scrip Dividend Alternative materially detrimental to those Shareholders electing for it, the Board has decided to cancel the Scrip Dividend Alternative in respect of the Q4 Dividend due to the Company’s Ordinary Shares currently trading at a larger than  10% discount to the published Net Asset Value (“NAV”). Accordingly, Shareholders will receive the Q4 Dividend in cash and, should they so wish, can choose to apply the cash dividend in acquiring Ordinary Shares in the secondary market.

Young black colleagues high-fiving each other at work© Provided by The Motley Fool

Cliff D’Arcy

As I get older, I get very enthusiastic about passive income — the earnings I accrue outside of paid work.

I have many options for grabbing these earnings, but find some rather unappealing. Here are five leading forms of extra income that I’m currently considering.

1. Savings interest

Perhaps the most straightforward and widely used passive income. I simply deposit money in a high-yield savings accounts and collect the interest. With the Bank of England’s base rate at 5.25%, table-topping savings accounts pay 5%+ a year, before tax.

However, I’ve met very few people who got rich solely by keeping their money in banks. Also, the taxman takes a chunk of my savings interest, so I’m not mad keen on this route.

2. Bonds

My second option could be to buy bonds — IOUs issued by governments, companies and other organisations. These pay me interest in the form of ‘coupons’, then later return my initial investment when they mature.

However, some bonds (say UK Gilts and US Treasurys) are safer than others, while struggling companies sometimes default on their bond payments. Perhaps I’d be better off investing in a broad-based, diversified bond fund ? This is something I’m actively considering right now.

3. Property

My third choice might be to become a buy-to-let (BTL) landlord, buying houses or flats and then renting them out to tenants. In my experience as a former tenant, this can be hard work at times. Hence, I’m reluctant to become a ‘BTL baron’ later in life.

An easier alternative is the government’s ‘Rent a Room Scheme’, which lets me earn up to £7,500 tax-free each tax year by letting out a room in my own home. However, I’m sure my wife wouldn’t agree to this, so I’ll also reject this.

4. Pensions

In 37 years of work, I have amassed a jumbled collection of various personal, company and state pensions. As I have reached 55, I could access these pots for income or lump sums. But I think it’s too early for me to do this yet, so I will leave them alone for now.

5. Share dividends

Cash dividends from stocks and shares are by far my favourite form of passive income. Though these payments are not guaranteed, dividends are my family’s second-largest income (after paid work).

For example, my wife and I own shares in FTSE 100 firm Legal & General Group (LSE: LGEN) as part of our family portfolio. While previously working in the insurance and investment world for many years, I became an admirer of this long-established company, its sound business model and solid management.

At the current share price of 242.8p, L&G is valued at £14.5bn, making it a Footsie stalwart. However, its shares are down 2.5% over one year and 12.4% over five, excluding dividends.

Share-price falls have lifted L&G’s dividend yield to a tidy 8.4% a year — almost twice the FTSE 100’s yearly cash yield of 4%. This high (and steadily rising) income is my #1 reason for owning this stock.

Then again, with £1.3trn of client assets under management, L&G shares can and do fall when share prices drop, as happened in Covid-hit 2020. And like all stock, its price can be volatile. Still, we are holding these shares for the long run!

The post 5 ideas for passive income while I sleep appeared first on The Motley Fool UK.

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Cliff D’Arcy has an economic interest in Legal & General Group shares. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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Warren Buffett’s famous quote is: “If you don’t find a way to make money while you sleep, you will work until you die.” This emphasizes the importance of creating passive income streams to achieve financial freedom. Buffett believes that investing in assets that generate income on their own, such as stocks or real estate, is the key to building wealth over time.

Property, if you don’t have enough funds to for a buy to let property deposit another alternative is to buy Investment Trust REIT’s, with less hassle but more risk.

One Trust that owned rental properties was PRS Reit, which is up for sale but still trades at a discount to NAV but as always best to DYOR.

GRS

A simple strategy would be to re-invest your dividends back into the Trust.

When you have achieved the holy grail of investing in that you double your money, you take out your stake and re-invest in another high yielder.

I will use NESF as the working example but as always best to DYOR, a blended yield of 17%, an investment of 10k would be yielding 17% on your initial stake, (£1,700 plus) which you should receive as long as the Trusts stay in business or don’t change their dividend policy. All you need to do to monitor your Snowball, is to check the latest dividend announcement from the company. There are various web sites that allow you to do this, if you don’t have your own share monitor.