7 Types of Passive Income

Are you intrigued by the idea of earning a passive income?  

The excitement of trading can be electrifying. From the exhilaration of a perfectly timed buy to the satisfaction of capitalising on an open position, these moments drive the enthusiasm of active traders. However, amidst the volatility of the market, have you ever contemplated the allure of a consistent income stream – a reliable cushion that complements the inevitable ebbs and flows of trading?  

Embracing a reliable income stream, nearly impervious to the daily market oscillations, could offer tranquillity and enable you to devote more attention to your trading endeavours. Now let’s dive deeper into understanding passive income and the ways to earn it. 

What is a passive income? 

Passive income is income that requires little to no effort to maintain.  

It’s distinct from active income, which you earn from your regular job and short-term trading, where you actively buy and sell securities over short durations to capitalise on market movements. Unlike short-term trading which requires constant attention and management, passive income streams generate returns with minimal ongoing effort.  

The key difference is the level of ongoing work required. With passive income, you take the steps to set it up or purchase the asset, and then look forward to collecting the rewards over time, freeing up your time to pursue other activities, like active trading.  

Here at Vantage, we understand the importance of diversification, and that extends beyond your trading arsenal. Building a well-rounded strategy involves incorporating passive income streams alongside your active trading activities. Let’s delve into 7 ways to cultivate passive income streams that work seamlessly with your active trading strategies:  

1. Dividend-Paying Stocks: Building a Stream of Reliable Income  

Companies with a strong track record of profitability often share a portion of their success with shareholders through dividends. These regular payouts in the form of dividends can be a great way to generate passive income.  

Here’s why dividend stocks can be a great fit for active traders:  

• Certainty and Predictability for Portfolio: Actively traded stocks often come with high volatility, promising substantial rewards alongside considerable risks. Dividend-paying stocks on the other hand, are typically associated with established, financially robust companies boasting a track record of consistent profitability, with dividend payouts amount being relatively consistent and hence, predictable. This stability and predictability can offer valuable anchors to your overall investment strategy, especially for active traders navigating the unpredictable currents of the market.  
• Compounding Your Gains: Dividends can be reinvested to purchase additional shares (often facilitated by Dividend Reinvestment Plans or DRIPs). Over time, as the company grows and share prices increase, so do your dividend payouts. This compounding effect can significantly amplify your returns in the long run.  
• Active Management and Income Flexibility: While dividend stocks offer a degree of predictability, you still have a say in how you manage them. For majority of companies offering dividends, you as an investor will receive the dividends in cash, which can supplement your trading income or be reinvested for further compounding.  

2. Real Estate Investment Trusts (REITs): Owning Income-Producing Property Without the Hassle 

If direct property ownership isn’t your cup of tea, REITs offer a way to invest in income-producing real estate without the hassle of being a landlord. These publicly traded trusts own and manage various properties, ranging from office buildings and apartments to shopping centres and healthcare facilities. REITs are required by law to distribute a significant portion of their taxable income to shareholders, usually as quarterly dividends.  

Benefits of REITs for Active Traders: 

• Diversification: REITs provide exposure to the real estate market without the complexities and risks of direct property ownership. This helps diversify your portfolio beyond the more typical stocks and bonds, potentially enhancing overall returns and reducing risk.  
• Liquidity: Unlike physical property, REITs are highly liquid assets that can be easily bought and sold on major stock exchanges. This allows you to adjust your holdings quickly, aligning them with your evolving trading strategies.  
• Professional Management: REITs are managed by experienced professionals who handle property selection, tenant relations and maintenance. This frees you from the time-consuming responsibilities of being a landlord, allowing you to focus on your active trading activities. 

Exploring REITs:  

• Research different types of REITs, such as residential, commercial, healthcare and mortgage REITs, to find one that aligns with your investment goals and risk tolerance.  
• Analyse the dividend yield, payout ratio and historical performance of the REIT.  
• Consider the fees associated with investing in REITs, such as management fees and acquisition costs.  

There are multiple ways you can choose to invest in REITS. Publicly traded REITs are listed on major stock exchanges, which are available through brokers; non-traded REITs shares can be purchased through a broker participating in the non-traded REITs offering and REITs can also be invested through Mutual Funds or ETFs. 

3. Peer-to-Peer Lending: Putting Your Capital to Work Directly 

The rise of fintech has opened up new avenues for passive income generation. Platforms like peer-to-peer (P2P) lending connect you with individuals or businesses seeking loans. By investing in these loans, you can earn interest on your capital, potentially offering higher returns than traditional savings accounts. 

Just like any other forms of investments, it is important to understand that P2P lending come with certain risks. Before making the decision to jump onboard the P2P lending track, here are some risks you should be aware of:   

1. Credit Risk: P2P loans are exposed to high credit risks. Many borrowers who apply for P2P loans have low credit ratings, making it challenging for them to obtain conventional bank loans.  

2. No Insurance or Government Protection: Unlike traditional bank deposits, P2P lending does not come with government-backed insurance or protection. If a borrower defaults, you may not have recourse to recover your investment.  

3. Platform Risk: There’s a risk that the P2P lending platform itself could face financial difficulties or go out of business. If the platform fails, it could impact your investments.  

4. Psychological Risk: Investing in P2P lending requires emotional resilience. Some investors may find it stressful to handle the ups and downs of loan performance.  

Why Peer-to-Peer Lending can be Attractive to Active Traders:  

• Higher Potential Returns: Compared to low-interest savings vehicles, peer-to-peer lending offers the possibility of earning significantly higher returns. According to data from LendingClub, one of the largest P2P lending platforms in the US, historical average annual returns for investors have ranged from 4% to 7% after accounting for loan defaults and fees ^[1]. This can be particularly appealing to active traders seeking ways to maximise their investment potential.  

• Flexibility and Control: You have a high degree of control over your investments. Platforms allow you to choose loan amounts, terms and borrower risk profiles, tailoring your investment strategy to your risk tolerance and desired returns.  
• Short-Term Investment Options: Some peer-to-peer lending platforms offer short-term loans with repayment periods ranging from a few months to a year. This aligns well with the active trader’s mindset of capitalising on opportunities and potentially freeing up funds for new trades as needed.  

Exploring Peer-to-Peer Lending: 

• Thoroughly research different peer-to-peer lending platforms, comparing interest rates, fees and borrower vetting processes.  
• Understand the risks involved, as there’s a chance of borrowers defaulting on loans. Diversification across multiple borrowers can help mitigate this risk. 
• Consider the tax implications of peer-to-peer lending income.  

4. Building an Online Business: Passive Income with Active Upfront Work  

While not entirely passive in its initial setup, building an online business can generate ongoing income streams with minimal ongoing maintenance. Here are a couple of options to consider:  

• E-commerce through Drop shipping: Drop shipping allows you to sell products online without holding any inventory yourself. You partner with a supplier who stores, packages and ships products directly to your customers. This removes a significant burden of physical logistics, allowing you to focus on marketing and customer service.  
• Subscription Box Service: Curate and ship themed boxes filled with products to subscribers on a recurring basis. This model offers the potential for recurring revenue and customer loyalty.  

Benefits for Active Traders:  

• Scalability: Online businesses can be scaled up or down depending on your available time and resources. This allows you to adjust your involvement as needed, accommodating your active trading schedule.  
• Location Independence: Many online businesses can be run from anywhere with an internet connection. This frees you from geographical limitations, potentially allowing you to travel or manage your business remotely.  

Exploring Online Businesses:  

• Research different online business models to find one that aligns with your interests and skills.  
• Develop a business plan outlining your target market, marketing strategy and financial projections.  
• Utilise online resources and educational platforms to learn best practices in e-commerce or subscription box management.  

Explore how CPA marketing efforts can help you and your business grow with passive income.  

5. Earning from Affiliate Marketing: 

Affiliate marketing offers a unique proposition, allowing you to monetise your content and expertise while fostering genuine connections with your viewers. This strategy empowers creators to move beyond traditional advertising methods and instead leverage your creativity and established audience to organically promote products and services you truly believe in.  

Benefits for Active Traders:  

• Diversified Income Stream: Affiliate marketing offers a way to earn income independent of trading results. This can create a financial safety newt and reduce stress during market downturns.  
• Targeted Audience & Increased Engagement: This positions active traders to create targeted content that resonates with other active traders, leading to a higher conversion rate for affiliate products and services.  
• Flexible Time Commitment: Affiliate marketing allows for a flexible time commitment, which can be ideal for active traders with busy schedules. You can create content and manage affiliate partnerships in between trading sessions.  

Exploring Affiliate Marketing: 

• Focus on a niche you’re passionate about and knowledgeable in.  
• Explore networks like Commission Junction or ShareASale to discover programs relevant to your niche.  
• Utilise analytics tools offered by affiliate programs and your chosen platforms to track clicks, conversions and overall performance.  

6. Investing in Managed Accounts  

If you lack the time or expertise to actively manage your portfolio, consider investing in managed accounts. These accounts are overseen by professional money managers who make investment decisions on your behalf, aiming to achieve your financial goals.  

Benefits for Active Traders: 

• Professional Management: Managed accounts free you from the burden of researching and analysing individual stocks and market trends. This allows you to focus on your active trading activities while your overall portfolio benefits from professional oversight.  
• Diversification and Risk Management: Money managers can create diversified portfolios that align with your risk tolerance, potentially mitigating risks associated with active trading.  
• Tax Optimisation: Experienced money managers may employ strategies to minimise your tax burden on investment gains.  

Exploring Managed Accounts: 

• Research different investment firms and money managers to find one with a track record of success and an investment philosophy that aligns with yours.  
• Understand the fees associated with managed accounts, which can vary depending on the investment firm and the complexity of the strategy. 
• Maintain clear communication with your money manager regarding your investment goals and risk tolerance.  

• Take advantage of robo-advisors that base their portfolio management on algorithms, eliminating the need for dedicating human advisor which translates to significantly lower fees compared to traditional managed accounts.  

Learn more about PAMM account and how you can benefit from it. 

7. Broker Promotions and Bonus Programs:  

Many brokers offer promotions and bonus programs that can effectively generate passive income for active traders.  

Benefits for Active Traders: 

• Boost Returns: These promotions can provide an additional return on your investment, essentially generating passive income alongside your active trading activities.  
• Minimise Capital Outlay: These promotions often don’t require significant additional investments, allowing you to leverage your existing trading capital for potential gains.  

Explore Broker Promotions:  

• Research promotions and bonus programs offered by your chosen broker. 
• Carefully review the terms and conditions of each promotion to understand eligibility requirements, activity thresholds and withdrawal limitations.  
• Integrate these promotions into your overall trading strategy to maximise your potential benefits.  

Conclusion: Building a Sustainable Financial Future 

Active trading can be exciting and rewarding endeavour. However, incorporating passive income streams into your financial strategy can provide a valuable safety net and contribute to a more secure financial future. By exploring the options outlined above, you can create a diversified income portfolio that complements your active trading activities and allow you to pursue your financial goals with greater confidence.  

Remember, the key to success lies in careful planning, thorough research and a clear understanding of your risk tolerance.  

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