What is Passive Income?

Passive income is money you receive regularly without having to lift a finger. So, passive income beats active income. Ok, it’s not as simple as that.

You got to work hard in the beginning in order to receive passive income. Please let me elaborate with an example.

Tom works hard in his day job for an active income. He can then set aside 10% of his monthly income (or $300) to build a passive income.

He decides to invest in a dividend exchange-traded fund (ETF) such as Vanguard Dividend Appreciation ETF (NYSEARCA:VIG). Although the ETF only yields about 2%, it focuses on stable, quality dividend companies, such as Microsoft, Johnson & Johnson, and Pepsi.

Since Tom is investing for the long term, he thinks VIG is a good fit. Additionally, VIG’s expense ratio is only 0.10%, which means more of the holdings’ dividends will go to Tom as a passive income.

Averaging into a basket of quality equity ETFs for a passive income is simpler than building your own portfolio.

However, in the future, when Tom finds the time, he might learn to invest in quality dividend-growth companies and build a stock portfolio. In the meantime, Tom can start building a passive income stream with his ETF portfolio.

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Disclosure: At the time of writing, I own shares of Pepsi.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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