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What Is Passive Income and Why It Matters

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  Published in Stocks and Investing on Saturday, November 29th 2025 at 9:34 GMT by AOL

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How to Build a Reliable Income Stream: A Deep‑Dive into the Author’s “Favorite Passive Income Investment”
(Based on a 2023 AOL article, supplemented by linked resources)

1. What Is Passive Income and Why It Matters

The article opens by defining passive income as earnings that require little day‑to‑day effort—think dividends, rental payouts, or interest from savings. It highlights the growing trend among both seasoned investors and newcomers to seek “set‑and‑forget” strategies that grow wealth while freeing up time for other pursuits. The author cites several recent studies from Forbes and The Balance that show passive income accounts for over 30 % of total U.S. earnings for high‑income households, underscoring its potential to diversify a portfolio and provide financial security.

2. The Author’s Top Pick: REIT‑Based Real Estate Investments

After reviewing a range of options—including dividend‑paying stocks, high‑yield savings accounts, and peer‑to‑peer lending—the author settles on Real Estate Investment Trusts (REITs) as the “favorite passive income investment.” The article links to a Investopedia primer on REITs, which explains that these entities own, operate, or finance income‑generating real‑estate and are required by law to distribute at least 90 % of taxable income to shareholders as dividends. This structure translates directly into regular, often monthly, payouts that can serve as a dependable income stream.

Why REITs?

• High Dividend Yields: The author notes that, on average, REITs offer yields of 4–6 %, comfortably above many bond funds.
• Liquidity: Unlike direct property ownership, REITs trade on major exchanges, allowing investors to buy or sell shares without the hassle of property management.
• Tax Advantages: Dividend income from REITs is typically taxed at ordinary income rates, but investors can defer taxes by holding shares in tax‑advantaged accounts (IRA, Roth IRA). The article cites the IRS guidelines on REIT dividend taxation for further clarification.
• Diversification: REITs cover various sub‑sectors (office, retail, industrial, residential, healthcare, data centers), giving investors exposure to multiple market dynamics without buying physical properties.

The author’s own portfolio features a mix of large‑cap, dividend‑heavy REITs like Vanguard Real Estate ETF (VNQ) and iShares U.S. Real Estate ETF (IYR), both of which are linked in the article. The linked Morningstar reports show consistent performance and low expense ratios, strengthening the case for these vehicles.

3. Step‑by‑Step Guide to Starting with REITs

1. Define Your Goals
   - The article stresses the importance of aligning the investment with personal income goals, risk tolerance, and time horizon.
   - A quick worksheet (linked from The Balance) helps readers determine how much passive income they need and what level of volatility they can accept.

2. Choose the Right Vehicle
   - Public REIT ETFs: Offer diversification and low costs; the author prefers these for simplicity.
   - Direct REIT Shares: Provide more focused exposure but may come with higher fees.
   - REIT Mutual Funds: A middle ground, though mutual funds often have higher expense ratios.

3. Open a Brokerage Account
   - The article links to Charles Schwab’s guide on opening a brokerage account for beginners.
   - It recommends starting with a Roth IRA for tax‑free growth if the investor qualifies.

4. Diversify Within Real Estate
   - The author suggests allocating at least 30 % of a portfolio to REITs, spread across different sub‑sectors.
   - A linked BiggerPockets blog post gives practical tips on identifying sub‑sector trends (e.g., data centers and e‑commerce logistics post‑COVID).

5. Automate Investments
   - Set up recurring deposits into the brokerage account.
   - The article points to a Personal Capital tutorial on automating contributions to investment accounts.

6. Monitor and Rebalance
   - The author encourages quarterly reviews of REIT performance and adjusting the mix as market conditions change.
   - A Seeking Alpha article linked in the piece provides a template for performance tracking.

4. Risks and Mitigation Strategies

While REITs are presented as a “favorite,” the article doesn’t shy away from potential pitfalls:

• Market Volatility: REITs can be sensitive to interest‑rate changes. A Bloomberg article linked in the text explains how rising rates can squeeze REIT yields.
• Sector Concentration: Heavy exposure to one sub‑sector (e.g., retail) can expose investors to cyclical downturns.
• Liquidity Risk: Some niche REITs may trade at low volumes, causing wider bid‑ask spreads.
• Tax Considerations: The author notes that ordinary dividend income may reduce overall tax‑efficiency if held in a taxable account.

Mitigation techniques include diversifying across sectors, using tax‑advantaged accounts, and maintaining a modest holding period (at least 5–7 years) to ride out short‑term fluctuations.

5. Complementary Income‑Generating Ideas

Beyond REITs, the article briefly explores other avenues that readers might combine for a more robust passive income plan:

• Dividend‑Paying Stocks: The author points to a Forbes article on building a “dividend aristocrat” portfolio.
• High‑Yield Savings Accounts & CDs: A NerdWallet comparison of online banks shows rates that exceed the federal minimum.
• Peer‑to‑Peer Lending: The Investor.gov guide explains how platforms like LendingClub offer returns of 6–10 %, but with higher default risk.
• Digital Products & Royalties: The author cites a CreatorIQ case study on earning passive income through e‑books and online courses.

These suggestions are framed as “add‑ons” rather than replacements for REITs, offering readers flexibility based on their risk appetite and interest.

6. Final Takeaway

The article concludes with a practical mantra: “Start small, stay diversified, and let the dividends compound.” By channeling a portion of a portfolio into REITs, the author has built a stable, growing cash flow that has helped fund lifestyle goals and protect against market downturns. The piece underscores that while no investment is truly “hands‑off,” a well‑researched, diversified approach—backed by the linked resources—can dramatically ease the journey to financial independence.

Quick Reference Checklist (Based on Article Links)

In a nutshell, the author’s favorite passive income investment is the REIT route—specifically diversified REIT ETFs that deliver high, regular dividends with minimal day‑to‑day management. By integrating this strategy into a broader portfolio that includes dividends, savings, and occasional peer‑to‑peer lending, investors can craft a resilient income stream that stands the test of time.