How do you feel about the idea of being able to sit back while you watch your money grow without you having to do much?
It’s appealing isn’t it. But that’s the promise of passive income – making a profit from savings and investments with little or no day-to-day involvement. It might sound too good to be true, and there are some drawbacks to this strategy. But it’s easier than ever to earn money from your investments without having to do a lot. Here are five ways to go about it.
Dine out on dividends
Dividends come from companies that reward shareholders with regular payments throughout the year. While dividend payouts have dropped off so far in 2025, UK companies paid out £92.1bn in dividends in 2024. The bulk of dividends come from FTSE100 companies, with HSBC leading the way in making the banking and finance sector the happiest hunting ground for dividend seekers.
Investment trusts can be especially useful, as they are allowed to retain up to 15% of annual earnings in reserve to be able to keep paying dividends during leaner times. This has enabled 20 investment trusts to increase their dividends each year for 20 years or more, according to the Association of Investment Companies, with several doing so for more than 50 consecutive years.
Dive into ETFs
Exchange traded funds (ETFs) have become increasingly popular in recent years, breaking new records as more investors opt for their low-cost access to assets and markets. Along with index funds, ETFs are a form of passive fund. While actively managed funds seek to outperform a particular index, benchmark or peer group, passively managed funds seek to follow or replicate a certain index. The value of your investment simply goes up and down in line with the relevant market or index.
ETFs investing in dividend-paying stocks are a particularly good way to generate a passive income, due to their low costs and the instant diversification provided when single ETFs track a whole index or market. We take a look at the cheapest platforms for your ETFs ISA. Also make sure you’re using the best investment platform for you. Use our comparison tools to select a platform and read our guides and articles to help you make more informed decisions.
Buy bonds
When you buy a bond you’re effectively lending money to the issuer for a fixed period of time in return for a fixed rate of interest, usually paid annually. Bonds can be issued by governments (gilts) or companies (corporate bonds). The higher the yield of a bond, the riskier it’s seen to be and the greater the chance that the issuer may not be able to pay out.
One way to build a passive income from bonds is to hold a range of issues with different maturity dates, so you can get regular payments as each one matures while also benefiting from the extra interest rate protection this strategy provides. Bond funds – including ETFs – provide extra diversification and promise a reliable income while typically taking less risk than equities.
Find out more from our article on how to invest in bonds.
Know your REITs
A Real Estate Investment Trust (REIT) is a type of fund that invests in property, giving investors access to bricks and mortar without having to own it. REITs provide investors with a slice of the rental income paid by the properties they invest in, such as offices, retail outlets, hotels and industrial real estate.
Like other investment trusts, they are listed on the stock exchange and have a closed-ended structure which means that – unlike property funds – they don’t have to sell assets to cover redemptions. You can diversify by investing in REIT funds or ETFs, providing broader exposure while spreading risk. Here’s more on investing in REITs.
Take the traditional cash route
One of the easiest ways to secure a passive income is to use old-fashioned savings accounts. You’ll get less income and growth than from stock market-based investments, and there’s a risk of failing to keep pace with inflation. But if your money is in a high-interest savings account or cash ISA, the interest payments will provide a modest form of passive income.
There’s still a few savings accounts paying around 4.5% to 5%, while several regular savings accounts pay 7% or more (though you usually need to have a current account with the provider). If you’re happy for your cash to be locked away for a set number of years, fixed-rate savings accounts or bonds can offer generous returns.
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