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Realities behind creating 'passive' income

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Dividend-yielding stocks
Dividend-yielding stocks | Henrik5000/Getty Images

Dividend-yielding stocks

Shareholders of dividend-yielding stocks receive a payment at regular intervals from the company's profits or reserves. Since the income received from the stocks isn't related to any activity other than the initial financial investment, owning dividend-yielding stocks can be one of the most passive forms of making money.

The tricky part, of course, is choosing the right stocks. Graves warns that too many novices jump into the market without thoroughly investigating the company issuing the stock. "You've got to investigate each company's website and be comfortable with their financial statements," Graves says. "You should spend 2 to 3 weeks investigating each company."

That said, there are ways to invest in dividend-yielding stocks without spending too much of an initial time investment. Graves advises going with exchange-traded funds, or ETFs. ETFs are investment funds that hold assets such as stocks, commodities and bonds, but they trade like stocks.

"ETFs are an ideal choice for novices because they are easy to understand, highly liquid, inexpensive and have far better potential returns because of far lower costs than mutual funds," says Graves.

Similarly, real estate investment trusts, or REITS, are a good choice for passive investors, although Graves warns that they're pricey right now. "With REITs, you can do the research in a much shorter period of time," says Graves. "Your level of understanding doesn't have to be high to make a (sound) investment."

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