The Best Investments That Pay Passive Income

Whether you’re growing your wealth for the future, or drawing down for living costs today, investments that pay passive income should be front and centre in your investment portfolio or retirement account.

For wealth-growers, income reinvested creates compound interest. That’s by far and away the most powerful tool available to grow your wealth over the long-term.

At the same time, for those of us nearing or already entering retirement, investments that pay passive income should arguably make up a significant portion of your portfolio.

With that in mind, here is my toplist of 19 investments that pay the best rate of passive income right now…

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Contents

• What is Passive Income?
• The Power of Compound Interest
• 21 Passive Income Investments for 2023
  • Certificates of Deposit
  • High Yield Saving Accounts
  • Dividend Aristocrats
  • REITs
  • MLPs
  • BDCs
  • Royalty Income Trusts
  • Preferred Stock
  • Dividends Index Funds and ETFs
  • Treasury Bonds
  • Municipal Bonds
  • Corporate Bonds
  • International Bonds
  • Bond Index Funds
  • Real Estate Syndications
  • Turnkey Rental Property
  • Private Money Lending
  • Performing Mortgage Notes
  • Peer to Peer Lending
• Conclusion

What Exactly is Passive Income?

Before we dive right into the list, let’s take just a minute to define exactly what we mean by passive income.

I’m defining passive income as ‘income that is earned with little need for ongoing active involvement or effort’.

For reference, it is the opposite of active income. I consider active income to be money that is earned through work or labour.

In the investment world, passive income usually means income that is received in the form of interest, dividends, rental or lease income, royalties, or business profits.

 In reality, ‘passivity’ is a subjective concept…

As far as I am concerned, no investment is truly 100% passive. One should always at least keep some kind of track of your investments and their performance.

As such, some investments are obviously more passive than others.

For the purposes of this list, I have included 21 passive income-generating investments. These selections are as close to ‘fire and forget’ as possible.

But again, whatever you choose to invest in (or not), do always make sure to keep an eye on things.

With all that said, let’s get started and look at my list of the 21 best investments for passive income right now…

1. Certificate of Deposits (CD)

 CDs are time deposits that typically offer higher interest rates than savings accounts. Usually the caveat is that the funds must remain in the account for a fixed term.

With a CD, your funds a federally insured by the FDIC. This means there’s no risk of capital loss, and that makes CDs a great diversification tool.

At the time of writing, the best rates available for CD investors were with Capital One and BMO Bank. Both are offering 5.00% in exchange for tying up your funds for between 11 months and 1 year.

Related: Investments That Pay Passive Income | Certificate of Deposit (CD)

2. High Yield Savings Accounts

Like CDs mentions above, these accounts are offered by financial institutions such as banks and credit unions. They offer a great low-risk passive income investment option.

They also offer higher interest rates than traditional savings accounts.

As with CDs, they are easily accessible to all investors, often have no minimum deposit amount, and are federally insured up to $250,000.

The best rate currently available for a high yield savings account is 4.20% p.a. from BMO Bank.

Related: Passive Income Investments | High Yield Savings Accounts

3. Dividend Aristocrats

Investing in the stock market is way less passive than a high yield savings account or CD. That said there are some stocks that are worth the extra effort based on their track record of paying above-average dividends.

These stocks are known as Dividend Aristocrats…

Dividend aristocrats are a limited group of stocks that have continuously increased their dividends year after year for at least 25 years.

These firms are often large, well-established, and have a solid business strategy that generates considerable cash flow. This allows them to reward shareholders with regular (and rising) dividend payments.

This also makes them potentially more passive investments because the fact the businesses are well-established, less volatile, and enjoy consistent revenue.

In order to qualify as a dividend aristocrat, a stock must be listed on the S&P 500 index and fulfil some other specific criteria, including a minimum market capitalization and liquidity requirements.

S&P Dow Jones Indices maintains and updates the list of dividend aristocrats on a yearly basis.

Related: Investments That Pay Passive Income | Dividend Aristocrats

4. Real Estate Investment Trusts

Real estate investment trusts (REITs) have been a stalwart of income-focussed investment portfolios since their introduction in 1960.

REITs were first introduced when President Eisenhower signed the REIT title act. This was a piece of legislation designed to allow retail investors to invest in large real estate assets via the stock market.

One of the reasons REITs are particularly popular with passive income investors is that they enjoy special tax status. Their income is not taxed at the corporate level, but rather shareholders pay tax on the dividend income they receive.

There is a bunch of qualifying criteria for a company to qualify as a REIT, but those that do often pay dividends on a monthly basis. This makes them even more popular with investors who rely on monthly income from their investments.

With annual yields ranging from low single digits through to double figures, REIT stocks could make a great addition to your passive income investment portfolio in 2023.

Related: Passive Income Investments | Real Estate Investment Trusts (REITs)

5. Master Limited Partnerships

Master Limited Partnerships (MLPs) are companies that are structured as public partnerships.

That means they combine the tax advantages of a limited partnership with the liquidity of a publicly traded stock.

In order to qualify as an MLP, a corporation must generate at least 90% of its income from qualifying sources. these include natural resource assets, commodities, or real estate.

Similar to REITs – MLPs must pay out the bulk of their net income to shareholders by way of dividend payments.

Due to the nature of the underlying business activities and frequency of their income, MLPs often also make more frequent dividend distributions than other companies.

These monthly or quarterly distributions can help to build a more consistent source of passive income for investors.

Related: Investments That Pay Passive Income | Master Limited Partnerships (MLPs)

6. Business Development Companies

Stock in a Business Development Company (BDC) can be great addition to any diversified portfolio or retirement account.

These types of stocks often pay monthly dividends, with higher-than-average yields then typical S&P500 stocks. They also offer the potential for capital growth.

Like REITs and MLPs, BDCs must distribute 90% of their income to shareholders. They also share some of the tax advantages because a business development company does not pay Federal income tax. Instead, individual shareholders pay their own taxes on income distributions they receive.

There are currently around 50 business development companies listed on stock exchanges in the US.

Related: Passive Income Investments | Business Development Companies (BDCs)

7. Royalty Income Trusts

Royalty Income Trust stocks have long been a popular option for investors seeking a higher rate of passive income.

These publicly listed companies are a type of investment trust designed to finance energy projects.

The trust raises funds for an underlying energy project such as a mine, gas deposit or oil well by selling shares.

Shareholders receive regular dividend distributions funded by royalty payments received from the underlying assets.

There are some interesting benefits to royalty income trusts. These include frequent dividend distributions, higher than average yields, and some tax benefits.

Related: Investments That Pay Passive Income | Royalty Income Trusts

8. Preferred Stock

Preferred stock (also referred to as “preferreds“) is a type of equity that is somewhat of a halfway house between common stock and bonds.

Like common stock, preferred stock represents ownership of the issuing company. But it typically carries a unique set of benefits that make it a top buy for investors looking for passive income.

Preferred stock takes priority over common stock when it comes to dividend distributions and claims over the company’s assets.

On the downside, preferred stock usually doesn’t have the same voting rights as common stock.

Perhaps the biggest advantage for preferred stockholders is the fact that these assets pay a preferred fixed income dividend. This makes them the perfect addition to a portfolio focussed on generating passive income.

Related: Passive Income Investments | Preferred Stock

9. Dividends Index Funds and ETFs

If you are going to invest in the stock market with the aim of collecting passive income, then one of the best ways to go about it is to buy index funds and ETFs that invest specifically for dividend income.

Dividend Index Funds are a type of mutual fund that attempt to track the performance of a specific dividend-focused index.

They typically invest with the aim of replicating or outperforming the yield and performance of the index.

Dividend ETFs are essentially the same thing as dividend index funds. The main difference being that stock in an ETF can be traded on an exchange just like the underlying stocks in the fund itself.

Both types of fund aim to provide investors with exposure to equity positions in a diverse range of companies that regularly distribute dividends. this makes them ideal for inclusion as part of a passive income-focussed portfolio.

Related: Passive Income Investments | Dividend Index Funds and Dividend ETFs

10. Treasury Bonds

When it comes to safe and reliable passive income-generating investment options, US Treasury bonds are the cornerstone of financial markets.

These bonds are issued by the United States Department of the Treasury, and are widely recognized for their low risk and steady passive income returns.

There are actually 3 types of treasury bonds; Treasury Bills, Treasury Notes, and Treasury Bonds.

T-Bills are short term bonds, with maturities of up to 1 year. Whereas T-Notes range in maturity from 2 to 10 years, and T-Bonds up to 30 years.

Passive income investors love Treasury bonds because they are guaranteed by the US Government. This makes them possibly one of the safest investments available.

Related: Passive Income Investments | US Treasury Bonds

11. Municipal Bonds

Municipal bonds are debt securities issued by state, city, county, or other local governmental entities to finance capital projects.

When you buy a municipal bond, you’re essentially lending money to the issuer in exchange for a promise to receive periodic interest payments and the return of the bond’s face value when it matures.

Municipal bonds are popular with investors because they are relatively low risk. They also pay passive income which is not subject the Federal income tax.

On the downside, like all bonds, municipal bonds are susceptible to interest rate fluctuations. When interest rates rise, bond prices fall, and vice versa.

Related: Passive Income Investments | Municipal Bonds

12. Corporate Bonds

The bond market has been the traditional first port of call foe income investors since the inception of financial markets.

Companies use these markets to raise debt, and investors buy bonds for the passive income they deliver.

Not only to bonds deliver passive income, but the price at which bonds are traded also fluctuates based mostly on the movements of interest rates.

There are also various types of bonds, from investment-grade bonds through junk bonds, not to mention convertible bonds and secured bonds, so it’s well worth doing some research before you dive in.

Related: Passive Income Investments | US Corporate Bonds

13. International Bonds

International bonds are debt securities issued by foreign governments, municipalities, or corporations outside the investor’s home country.

For the US public, this means bonds that are not issued by entities within the United States.

Just as domestic bonds are a way to lend money in exchange for interest payments and the eventual return of the principal, international bonds serve the same purpose but with the added dimension of cross-border investing.

There are lots of different types of international bonds issued by governments and corporations in all sorts of currencies.

You can buy international bonds through a broker, or through an exchange traded fund that investments in international bonds.

Related: Passive Income Investments | International Bonds

14. Bond Index Funds & ETFs

If you are going to invest in bonds for passive income, one of the best ways to go about it is to buy index funds and ETFs.

Bond Index Funds are a type of mutual fund that attempt to track the performance of a specific bond index.

The fund manager invests with the aim of replicating or outperforming the yield and performance of the index.

Bond ETFs are pretty much the same thing as bond index funds. The key difference is that stock in an ETF is traded on an exchange.

Both types of fund aim to provide investors with exposure to bonds issued by a diverse range of companies. This makes them ideal for inclusion as part of a passive income-focussed portfolio.

Related: Investments That Pay Passive Income | Bond Index Funds and ETFs

15. Real Estate Syndications

Real estate has long been a favourite of investors seeking passive income, and real estate syndications offer that and more.

A syndication is essentially a group of investors pooled together to purchase large real estate assets.

A General Partner will arrange the deal, then raise money from Limited Partners who are effectively passive investors in the syndication.

As an LP, the investor receives a return from both the rental/lease income, and any capital growth.

While all syndications differ in terms of the specific terms offered to investors, they can make a great addition to a portfolio focussed on passive income generation.

Related: Passive Income Investments | Real Estate Syndications

16. Turnkey Rental Property

Perhaps one of the most popular investments for passive income is owning physical real estate.

Obviously, owning rental properties can be more time-consuming than owning other more passive income investments such as REIT stocks. That said, with careful and considered planning owning rental can be relatively hassle free.

In order to ensure your rental property investment is a passive as possible, you should consider buying a well-maintained property in a good location from a reputable turnkey investment provider.

All things being equal, a good quality house, condo or commercial building with a reliable tenant and quality property management can generate reliable and fairly passive income for years to come.

Of course, real estate also has the advantage of leverage. That means you can borrow some (or sometimes even all) the money required. So, you can receive income from a much larger asset while your tenant effectively pays off the mortgage.

Related: Investments That Pay Passive Income | Turnkey Rental Properties

17. Private Lending

Private lending is a great way for private investors to earn passive income and a better rate of interest than other investments.

This is where one private individual or entity lends money to another, and a piece of real estate is put up as security for the loan.

Real estate investors use private money loans to fund short-term investments like fix-and-flips or rental properties. usually, the loan is short term, interest only, and is paid back when the borrower sells or refinances the property.

Lenders can earn between 8% and 15% p.a. depending on the project, borrower, and lending terms.

Related: Passive Income Investments | Private Lending

18. Performing Mortgage Notes

Performing mortgage notes are debt instruments secured against real estate. Investors buy real estate notes for the passive income the generate and the fact the are asset-backed.

Mortgage notes are freely traded between investors, and there are plenty of online platforms with mortgage notes for sale

They can deliver passive income yields from 6% to as high as 20% depending on the risk associated with the underlying loan and collateral.

You can hold a performing mortgage note in your self directed IRA retirement account, or just in your own name as part of a portfolio of investments.

Related: Performing Mortgage Notes | Everything You Need To Know

19. Peer to Peer Lending

Conclusion