Skip Buying a Rental Property. Investing $90,000 in These Stocks Could Make You Over $7,000 in Annual Passive Income.

Several of my friends and family members own or have owned rental properties. It can be a great way to generate passive income. However, one common complaint that I’ve heard from them is that the income they make isn’t nearly as passive as they’d like. Headaches of owning rental properties include dealing with difficult tenants and unexpected repair costs.

Using an experienced property manager can help. The catch is that doing so eats into how much you make.

I have another idea, though: Skip buying a rental property and instead buy high-yield, high-quality dividend stocks. Investing $90,000 in these three stocks could make you over $7,000 in annual passive income.

If you like the idea of owning real estate without any hassles, consider buying shares of Realty Income (NYSE: O). This real estate investment trust (REIT) owns over 15,600 properties spread across all 50 U.S. states, plus the U.K. and six other European countries.

REITs must return at least 90% of their profits to shareholders as dividends to be exempt from federal income taxes. Realty Income pays a monthly dividend with a forward yield of 5.67%. A $30,000 stake (one-third of the $90,000) invested in the stock would generate roughly $1,701 in income on an annual basis at this level.

There’s an excellent chance you could make even more passive income in the future by investing in Realty Income, though. The REIT has increased its dividend for 30 consecutive years. I fully expect this streak will continue.

Wondering what kind of real estate you’d partially own if you were a Realty Income shareholder? Think convenience stores, grocery stores, discount stores, home improvement retailers, restaurants, and more. No client makes up more than 3.5% of Realty Income’s total annual rent.

You don’t have to limit yourself to real estate to enjoy steady and dependable income, though. Ares Capital (NASDAQ: ARCC), the largest publicly traded business development company (BDC), pays a forward dividend yield of 8.6%. Another $30,000 invested in Ares would generate $2,580 in annual passive income.

BDCs typically provide financing to middle-market businesses with annual revenue ranging between $10 million and $1 billion. This is a growing market, as these clients seek the reliability and speedy execution that BDCs such as Ares Capital offer.

Ares Capital’s investment portfolio includes 550 companies representing a wide range of industries. Its largest investment makes up only around 2% of the total portfolio. The company continually monitors its portfolio to spot any trouble signs as early as possible. As a result, Ares Capital’s annual loss rate is much lower than the industry average.