Earning passive income for the rest of my days sounds like a dream. But I can think of three ways that give me a chance to make it a reality.

Big hitter

One option for me is to buy shares of companies that pay dividends. Fortunately, there is no shortage of them on our domestic market!

An example would be a financial services provider Legal and general information (LSE: LGEN).

From my research it appears that this FTSE100 giant has a monster projected dividend yield of 9.3%. That makes it one of the biggest payers in the entire market. For comparison, that’s also almost twice what I’d get from a top-tier Cash ISA.

On top of that, the company has a decent track record of increasing the amount of cash it returns each year. That’s something I really like to see. A enormous dividend is nice, but a growing one suggests the underlying business is in good shape.

Another reason I should invest in this stock is its valuation. Changing hands for a little less than 11x future earnings, Legal and General looks inexpensive relative to the rest of the market. So there’s a chance I could make a decent capital gain on this passive income if/when economic confidence returns.

Don’t assume anything

Despite all these good things, it would be foolhardy to rely on a single share as my passive income stream for the rest of my life. Dividends are never stamped. In fact, they can be quickly reduced if the company gets into trouble. That’s exactly what happened at Legal & General during the financial crisis.

While I like the £14bn ceiling on the company’s potential earnings, building a portfolio of, say, 10-15 dividend stocks from across the UK market seems much more conservative and should aid mitigate this risk.

Worry-free investing

The second, less demanding way to earn passive income is to have… passive investments in the form of tracking indices

As they sound, these funds simply track market returns. If FTSE100 rises by 5% in a year, I can expect a fund that tracks that index to do the same (minus fees).

However, the FTSE 100 tracker also generates dividends. The yield is currently 3.6%.

The best thing about this strategy is that my money is spread across multiple companies, including Legal & General. The downside is that the passive income won’t be anywhere near what I would get from the other one.

This brings me to the third option: a combination of the two previously mentioned.

The best of both worlds

Why would that be a good thing? Well, every investor is different when it comes to how much risk we’re willing to take to achieve our financial goals. But trying to assess our own tolerance as accurately as possible should aid us build a portfolio that lets us sleep at night.

So there’s nothing stopping me from having a good chunk of cash in a conservative tracker fund or two, as well as holdings in a few great dividend stocks. Combined, that could give me more passive income than just tracking the index.

Over time, if reinvested, they can develop into something truly special.