The IRS defines passive income as net rental income or income from a business in which the taxpayer does not materially participate. Dividends and gains from stock sales are not considered passive per this strict definition. I would prefer to define income as passive along the lines of work and time commitment needed similar to Wikipedia’s definition “Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it”. Is rental income really passive? If it is a personal rental like a house or apartment, it is likely not all that passive. You will have to deal with maintenance requests, renter turnover, etc.
Dividend income from an index fund does not require any involvement from you once you buy it. The occasional time spent monitoring your funds as part of your overall investment strategy is minimal. But not all portfolio income is passive. The “set-it-and-forget-it” strategy of investing does not apply to any individual stocks since things can change much more quickly for an individual stock than for an index fund.
Requires some oversight:
To get passive portfolio income, you must accumulate quite a bit of savings first. If you are striving for financial independence and want to live off your portfolio, you need to accumulate 25 times your expenses in savings. This is based on the 4% rule as a safe withdrawal rate. Don’t worry about generating income from your portfolio until you reach that milestone. Just invest in a total market index fund (e.g. Vanguard’s VTI, iShares iTOT or Schwab’s SCHB) while you are in the wealth accumulation phase and reinvest all dividends.
Once you reached your accumulation goal and are starting to think about passive income, portfolio income is definitely my favorite and the potentially most “passive” of income streams. You can combine portfolio income with other passive income streams. Just like portfolio income required the upfront work of savings, you may have to do quite a bit of upfront work to create other passive income streams. To build passive income without much upfront investment, think about anything that requires you to do the work once and then generate ongoing income streams. Intellectual property falls into this category. This is definitely an area where creative people can excel. But even if you don’t consider yourself creative, think of the things you know that could be valuable to others. Let’s look at some potential examples
Publish ebooks, paid articles, blogs, etc. This is only “semi” passive since the revenue stream tries up pretty quick. There is a constant stream of new books and articles to read, but it can be fun and enjoyable to publish anyway. At least you can set your own schedule.
Create an app. Most apps have free versions and paid versions with more features. Monetizing your app with advertisements is another option.
Selling photos and images. This is a competitive field but you can get money every time somebody downloads one of your images. Check out Shutterstock or iStockphoto
Teach Alexa a new skill. Amazon has a program that pays developers for new skills that customers engage with.
Teach a class. If you have something to share and you are passionate about teaching, Udemy let’s you set up classes.
I am sure there are lots more ways to generate income and new opportunities can come up anytime. The gig economy provides potential income streams but not really passive income and it lots of them are low paid. I would prefer thinking in terms of “work once – get paid many times”. Never underestimate a well-paying job and consistent savings as wealth builder either. It sounds boring but the savings and investment growth is amazing if you are consistent and stick with it. Ultimately, you want enough money so that your portfolio can generate enough income.