Got $1,000? Here's How to Turn That Into a Passive Income Stream in 2023 | The Motley Fool (2024)

The old saying it takes money to make money is true for passive income. While there are some ways to make passive income without an upfront investment, these options either require lots of time and effort or that you take on a lot of risks. For those without the time and a high-risk tolerance, the easiest way to start collecting passive income is to invest some of your active earnings into an income-producing investment.

There are lots of ways to do this. Here are three strategies to turn $1,000 into a passive income stream this year.

Take it to the bank

The Federal Reserve made many passive-income opportunities more attractive by raising interest rates last year. For example, the rates on bank CDs have risen sharply, with some of the best CD ratescurrently over 4%.

While some banks require a minimum deposit of more than $1,000 to lock in a higher rate, many offer lower minimums. Iit's easy to find one and lock in at least a 4% interest rate for the next year, turning a $1,000 investment into about $40 of passive income.

Lend it to Uncle Sam

Higher interest rates also mean that bond yields have increased. Many government bonds yield more than 3.5% these days. Meanwhile,I Bonds, which are inflation-protected government bonds, currently pay an annualized rate of 6.89% for the first six months.

Anyone can lend money directly to the Government (at TreasuryDirect.Gov). There are many options, including:

• Treasury Bills:Short-term debt (with terms ranging from 4 to 52 weeks) with rates recently around 3.5%.
• Treasury Notes:Mid-term debt(with terms of 2, 3, 5, 7, or 10 years) and a current rate of 4.125% on the 10-year note.
• Treasury Bonds: Long-term debt (with a term of 20 or 30 years) at a 4% interest rate.
• I Bonds: Inflation-protected debt with a rate that resets every six months (currently at 6.89% for I Bonds purchased through the end of April). You must hold I Bonds for at least a year but lose three months of interest if redeemed before the end of five years.

These allow anyone to turn $1,000 into $35 or more of annual passive income.

Grab your share of the profits

Many companies makedividend paymentsto their shareholders from their profits. They range in size (i.e., thedividend yield) and payment schedule (monthly, quarterly, bi-annually, and annually).

One of the benefits of investing individend stocksis their upside potential. Many of the best dividend stocks increase their payments at least once per year. In addition, investors can benefit from share price appreciation. However, dividend stocks are riskier than CDs and Treasuries. Companies can cut their dividends during tough times, and stock prices can fall.

There are many great dividend stocks to choose from that offer attractive yields, making them ideal for collecting passive income. For example,Realty Income(O -0.71%) currently pays a monthly dividend that yields 4.5%. That could turn a $1,000 investment into $45 of passive income. The real estate investment trust (REIT) has increased its dividend for 101 straight quarters.

Meanwhile, telecom giantVerizon(VZ 0.98%) offers an even higher dividend yield at 6.3%. That could turn $1,000 into $63 of annual passive income that investors would receive in four quarterly installments. Verizon also has an excellent track record of growing its dividend payment. It delivered its 16th straight year of dividend growth last year, the longest streak in the U.S. telecom sector.

Many ways to make money on your money

The Federal Reserve's strategy to raise interest rates to combat inflation provides income-focused investors with more options. Bank CDs and Treasuries offer much more attractive yields, making them risk-free ways to collect passive income. Meanwhile, many dividend stocks provide attractive yields and the potential for dividend growth and price appreciation, often making them worth the risk. It's a great time to have $1,000 available to make a passive income-focused investment.