5 ways to start passive investing

Imagine going to sleep and waking up with more money in your bank account. Sounds like a dream, right? Well, with passive investing, that is exactly what can happen.

What is passive investing?

Passive investing refers to buying a security to own it long-term. Also referred to as a buy-and-hold strategy, passive investing is a way to build wealth over time. By investing in some of the options outlined below, you can earn a passive income, meaning profits that take little to no work on your part.

Read on for five of the best ways to start passive investing.

Dividend stocks

 One of the most simple passive investment methods, dividend stocks involve investing in a public company. When that company generates profits, the investors receive a portion of those earnings in the form of dividends. Investors can then decide to take the cash or reinvest in additional shares. While investing in a shiny new company may be tempting, it is safest to opt for the companies that have at least a 25-year track record of paying out substantial dividends. The latter such companies are generally referred to as “dividend aristocrats” in the S&P 500 index, which lists the 500 leading publicly traded companies in the U.S.

 Bonds and bond index funds

While stocks are a way to buy an ownership stake in a company, bonds involve lending money to companies or federal, state and local governments. You then collect interest as a passive income. Bonds usually pay interest twice a year. If you hold the bond to maturity, you get back the entire principal. Because bonds are less volatile than stocks, they are generally considered to be a safer investment option, but the return on investment (ROI) is also lower.

Index funds

 Index funds are mutual funds or exchange traded funds (ETFs) that include a portfolio created to match the components of a financial market index such as the S&P 500. Index mutual funds offer investors broad market exposure, as well as low operating expenses and low portfolio turnover. Investing in index funds is a wise choice for the average investor. Warren Buffet, one of the most well-known and successful investors, suggests index funds for those aiming to have savings in their later years. Index funds are thus excellent core portfolio holding options for individual retirement accounts (IRAs) or 401(k) accounts.

Real estate investment trusts (REITs)

Created by Congress in 1960 as a way for individual investors to own equity in large-scale real estate companies, REITs are an excellent investment option for those looking to diversify their portfolio. REITs are companies that own commercial real estate, that is, income-producing real estate, such as apartments, hotels, office buildings, warehouses, and malls. REITs generally pay high and growing dividends, allowing you to build passive income from real estate without the hassle of buying and managing a property yourself. Some REITs are publicly traded on stock exchanges while others are not. If you are new to investing, stick with the publicly traded REITs. These tend to be more transparent than other types of REITs.

 Peer-to-peer lending

While with a direct loan individuals apply for funds through a bank or other financial institution, peer-to-peer lending is the process of acquiring a loan directly from another individual. If you have extra funds in your savings account, you may want to consider becoming a peer-to-peer lender. These lenders dole out their own money in the form of loans and earn interest in exchange. Depending on the lending platform used, you could offer loans for as little as $25. Lending through such a platform is ideal, as these platforms offer terms that may protect you in the event that an individual does not pay back your loan.