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There’s more than one way to earn passive income in the stock market. And this is something investors worried about artificial intelligence (AI) stocks might want to take note of.
It’s no secret that valuations in some sectors look stretched and there’s a real possibility share prices could fall sharply. But this is something investors can try to use to their advantage.
Covered calls
Selling ‘call options’ is a strategy that’s been gaining popularity. These give the owner the right (but not the obligation) to buy a stock at a specified price before a certain date.
If the stock doesn’t get above the specified price before the deadline, the option expires and the seller keeps whatever the buyer paid for it. And that can generate passive income.
The risk is unlimited if the seller doesn’t own the stock in question before selling the option. But for someone who owns the stock already, it can be a way to earn extra cash from the asset.
This can be a very effective strategy if share prices go down. But the risk with selling calls is that it means giving away the excess profit if the stock goes above the strike price.
Someone who owns 100 Nvidia shares, for example, could sell a call option with a $220 ‘strike price’. But then the investor can only sell the stock for $210 even if it reaches $250 or $280.
The cash raised by selling an option is unlikely to offset this. So anyone who isn’t expecting a stock market crash next year should think carefully about whether this is the right strategy.
Dividend stocks
The other main strategy for earning passive income involves buying shares in companies that pay dividends to investors. And there’s an obvious advantage to this strategy.
Where selling call options limits the potential gains, these gains are unlimited with dividend shares. Investors stand to get the full benefit if share prices go higher.
A good example of a dividend stock that I think is worth considering right now is Admiral (LSE:ADM). It comes with a 5.75% yield, which is well above the FTSE 100 average.
Inflation is a constant risk for the firm. If more expensive car repairs make its costs go up in 2026, it can’t immediately increase premiums to customers to compensate for this.
Importantly though, car insurance contracts only last a year or so. And that allows Admiral to adjust for rising costs more quickly than its counterparts in the life insurance industry.
The firm’s biggest strength however, is its unique data and analytics. This is a key advantage and it’s why the firm has consistently maintained higher margins than other insurers.
Income investing in 2026
Ultimately, dividend stocks are my top passive income idea for 2026. Investors might try to give yields a boost by selling covered calls, but this is a strategy they need to be careful with.
Selling covered calls comes with the constant risk of trading away a big investment gain for a much smaller one. And that’s the opposite of what I’m looking for with my investments.
That might make sense for some investors. But I’m focusing on stocks with long-term growth potential and I don’t want to risk giving that away in 2026!
