Investing in passive income can allow you to make money with minimal portfolio management. There are many types of investments to make passive income. If you have $10,000, here are eight common passive investments to consider.
A financial advisor can help you create a financial plan for your passive investments.
What Is Passive Income?
Passive income is generated with minimal involvement by an investor. This is the opposite of active income, which requires investors to take a hands-on approach that focuses on portfolio management.
Whereas active investors aim to beat average returns from the stock market by taking advantage of short-term price changes, passive investors limit how much they buy and sell with the goal of holding an investment over a long time horizon.
Common examples of passive investments include the interest that you can make from a savings account or a bond, rental income that you can collect from real estate and dividends that you can get from holding stock in a company.
8 Ways to Invest $10k for Passive Income
There are certain investments you can add to a portfolio that are designed to produce a continuous flow of income. Whether you’re required to do any work upfront can depend on the investment. Here are eight common ways to invest $10k for passive income:
Dividend stocks. Dividend stocks pay out dividends to shareholders periodically. A dividend represents a percentage of a company’s profits.
Investing $10,000 into dividend stocks could make sense if you want to create current income. You could also reinvest dividends into additional shares of the same stock to grow your portfolio.
Historically, the highest-paying dividend stocks have outperformed the S&P 500 60% of the time. Since 1973, dividend payers have delivered an average annual return of around 10%, which isn’t too shabby if you’re looking primarily for passive income. Despite economic uncertainty, a number of companies boosted dividend payouts in 2022 or announced increases for 2023.
In terms of which dividend stocks are best, you may want to start with the Dividend Aristocrats. Those are companies that have increased their dividend payout annually for 25 or more consecutive years.
Real estate. Real estate can generate passive income if you’re collecting rent from tenants on a monthly basis. Historically, real estate has delivered strong returns to investors that have at various times outpaced stocks. In 2021, for example, real estate produced an average annual return of 16.83%.
However, you will need more than $10,000 to get started with rental property investing. But you could, however, enjoy the income benefits of real estate without property ownership by investing in a real estate investment trust (REIT) instead. REITs own and manage investment properties and pay dividends to investors.
Other options for real estate investing include crowdfunded properties and real estate exchange-traded funds (ETFs). Either one could put dividend income in your pocket without the headaches that go along with being a property owner.
Dividend ETFs and index funds. An exchange-traded fund is a mutual fund that trades on an exchange just like a stock. Index funds attempt to mirror the performance of an underlying benchmark, such as the S&P 500.
Either one could be a good option for investing $10k for passive income through dividends if you’d rather own a basket of securities. Both ETFs and index funds can offer exposure to a broad range of investments, including stocks, fixed income and cash or cash equivalents.
You can spread your $10,000 out across multiple funds or focus on just one or two. When choosing dividend ETFs or index funds, it’s important to consider the underlying assets, historical performance and expense ratio to find the ones that best align with your goals and risk tolerance.
Bonds and bond funds. A bond is a debt instrument. When you invest in a bond, you’re allowing the bond issuer to use your money for a set time period. In exchange, the bond issuer pays interest back to you.
Bonds could be a good way to invest $10,000 for passive income if you’re looking for lower-risk investments. Certain bonds may also offer tax benefits. Municipal bonds, for instance, are generally tax-exempt at the federal level.
If you’d like to invest your $10k in different types of bonds, you might consider a bond fund instead. Like ETFs or index funds, bond funds can offer access to multiple investments in one convenient package.
Peer to peer lending. Peer-to-peer lending allows borrowers to connect with investors outside of the traditional lending landscape. You could turn $10,000 into passive income with P2P investments if you’re collecting interest on the loans you fund.
There are some risks to be aware of, however. Peer-to-peer lending can attract borrowers with less-than-perfect credit who may not be able to qualify for loans elsewhere. If you’re investing in these types of loans, you may be able to collect a higher interest payout. But the risk of the borrower defaulting may be higher as well.
High-yield savings accounts. A high-yield savings account isn’t an investment product, per se. Instead, it’s a deposit account that allows you to earn interest on your balances. That interest is another form of passive income.
Using a high-yield savings account to create passive interest income on a $10,000 investment could make sense if you want to keep your money in a safe place that’s easily accessible. You could also get a great rate with online savings accounts, many of which bumped rates to the 2%-to-3% range in 2022.
However, it’s important to keep in mind that even when savings account APYs are climbing, they typically lag behind the returns you could get in the market.
Annuities. An annuity is an insurance product that pays money to you according to a set schedule. Using $10,000 to purchase an annuity could provide you with an additional stream of income in retirement if you’re hoping to supplement Social Security benefits or withdrawals from a qualified retirement plan.
Annuities may not be right for everyone and it’s important to consider the cost and the level of returns you might be able to generate. It’s also a good idea to research annuity company credit ratings to find a reputable insurer to work with.
Certificates of deposit (CDs). A certificate of deposit is a time deposit account that allows you to earn interest on your money over a set time period. Once your CD matures, you can withdraw the interest earned along with your initial deposit.
Parking $10,000 or more in CDs could make sense if you know you won’t need the money before the maturity date. Withdrawing money from a CD early can trigger a penalty. You can potentially avoid that, however, by building a CD ladder with multiple accounts that have different maturity dates.
General Tips for Passive Investments
If you’re ready to start generating passive income from investments, it’s helpful to have a strategy or plan going in. Here are four common tips to help you decide how to best put your $10k investment to work:
- Assess the risk. Your risk tolerance can determine how and where you invest. Real estate, for example, can be a riskier bet than CDs so it’s a good idea to know where you fall on the risk spectrum.
- Allocate wisely. If you have $10,000 to invest for passive income, you’ll need to decide whether you want to put it all in the same investment or spread it across multiple investments. Going all in could help you generate more passive income at a faster pace, but it could also increase risk. If you want to manage risk through diversification or simply test the waters, you might try dividing up your $10k across multiple income streams.
- Know when to cut losses. It’s possible that a passive income stream may not pan out or just isn’t right for you and your goals. Reviewing your investments periodically can help you figure out what’s working and what’s not so that you can formulate an exit strategy to minimize losses.
- Pay attention to cost. Keeping costs down can help you to hold on to more of your investment returns. Trading stocks, for example, can trigger commission fees if you’re not trading with a $0 fee brokerage. Mutual funds, index funds, bond funds and ETFs can charge expense ratios on a yearly basis. Being aware of the cost can help you find the best passive income ideas for maximizing your $10,000 investment.
Bottom Line
Having one or more passive income streams can help you to get closer to financial freedom if you’re able to use the extra money to pay down debt, build savings or grow wealth for retirement. Exploring different passive income ideas is a good place to start if you have an extra $10,000 to invest.
Investing Tips
- A financial advisor can walk you through different ways to invest $10k for passive income, based on your specific goals and objectives. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Remember that passive income is still taxable, even though you may not be doing any work to earn it. Qualified dividends, for example, are taxed as capital gains on your return. When creating passive income streams through investing, it’s important to consider the potential tax implications and what you might be able to do to reduce what you owe each year.
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