Bill Gates earns USD 127 per second, USD 456,625 per hour, and more than USD 3 million each night while he sleeps. Wouldn’t it be great to earn money while you eat, sleep, or go on a holiday? Whether you have a typical nine-to-five job or run your own business, waking up in the morning with more money than you did before you went to sleep sounds too good to pass up. And guess what? You don’t have to be one of the richest people in the world to do it that. Enter, passive income.
What is passive income?
Passive income is income that is generated regularly from a source with minimal continual effort. You can set up a passive income source to supplement your salaried income, or, if you find a way to earn enough of it, it can be your primary source of income. The initial monetary input to generate any meaningful amount is generally substantial, which is why not all people can easily deploy a passive income strategy. Setting it up takes a fair amount of time to research and plan, but once you have the income stream up and running, it won’t take up much of your time going forward.
A quick Google search will give you dozens of ideas on how to earn a passive income, but you have to ask yourself what is realistic given your personal interests, the time you can put towards setting it up, and how much money you can invest initially to get the passive income stream going.
Below, we dive into a few investment options that can generate passive income. This way, you don’t have to worry about trying to write an e-book that sells thousands of copies.
Generate passive income with investments
Invest in bonds
Bonds are an investment instrument through which you lend money to a corporation or to a government, and in return, you receive periodic interest payments and the repayment of your invested capital at maturity.
Bonds range in risk levels. There are bonds that are considered low-risk, such as the Singapore Savings Bonds (SSBs), which are backed by the full credit and faith in the Singapore Government. There are also bonds that are considered risky or "junk bonds", meaning the risk of them defaulting (i.e not being able to meet interest payments) is high. The riskier the bond, the more you can earn in interest.
As of March 2019, SSBs pay approximately 1.90% to 2.50% p.a.; your returns depend largely on how long you hold the bonds and they are paid out semi-annually. Here, the maximum holdings amount is $200,000 (SGD). That means you could earn up to $5,000 p.a. on an investment of $200,000.
But $200,000 isn’t an insignificant sum, illustrating exactly how capital-intensive a passive income strategy can be. Investing $200,000 is a huge opportunity cost that you need to weigh out: This money could be used to put towards a down-payment on a house, or to invest towards your child’s education.
Invest in dividend stocks
Buying shares in a company can entitle you to dividend payouts from the firm in which you invest. You will be able to benefit not just from the dividend payouts, but also from capital gains, or the upside potential of a company, should their stock price rise. Stocks are generally considered riskier than bonds because, in the event of liquidation, bond-holders rank above equity-holders in the claim for the residual assets of the firm. Companies are not obligated to always payout dividends. Hence, if the company is not performing, they may decide to cut or not payout dividends at all.
They are also inherently more volatile and unlike interest payments for bonds.
What you can do when you’re considering whether to invest in dividend stocks is to look at blue-chips that pay you reliable and regular dividends. What are blue-chip stocks, you ask? These are shares from large, established and reputable companies, such as Singtel, CapitaLand, Singapore Airlines, that pay a dividend yield of 3% or more. What this means: if you invested $100,000 in one of these stocks with a dividend yield of 3%, you can expect an income per annum of $3,000. (Note that dividends may be paid out quarterly, semi-annually, annually or irregularly.)
Invest in an income portfolio
Many portfolio managers offer income portfolios so you don’t have to pick which bonds and stocks to invest in. This way, you are able to earn income while reducing the level of risk you take, because you’re entrusting a professional portfolio manager to do the selection. This portfolio should be designed to give you a regular income stream. Remember that each portfolio manager has a different investment strategy, so be sure to thoroughly evaluate how much risk the manager exposes your funds to, as well as what type of diversification and management strategy they have.
An income portfolio can be part of a much larger diversified portfolio where you may have growth stocks for your longer-term investment horizon.
Invest in real estate
Investing in real estate is a very popular option with Singaporeans. Many people strive to buy property either to own and live in it, or to buy and rent it out for rental income. Other than the large capital output required, what most people sometimes forget is that buying and maintaining a property is not cheap: you have to pay a buyer’s stamp duty, broker fees, building maintenance fees, repairs, and more. That said, renting out property can bring you passive income, as long as you are making more than what your costs are. Be sure to keep in mind that this can be a very time-intensive passive income investment option if you don’t have a property manager to handle the details for you.
An alternative to owning a physical property is to buy into a REIT, or Real Estate Investment Trust. These are funds that invest in properties such as housing, commercial, schools, and even data centres. The capital required to invest in REITs, and perhaps more importantly, the commitment required, is generally much lower than that of a physical property investment. Singapore REITs or REIT ETFs are required to payout at least 90% of their distributable income to their unit-holders to qualify for Tax Transparency by the Inland Revenue Authority of Singapore (IRAS). Once they do so, local and foreign investors will not be subject to the 17% withholding tax. This is an incentive for the REITs manager to maintain their regular payouts for the investors’ benefit.
Where do you go from here?
Having additional income sources can make your road to financial independence much shorter and easier. The earlier you start setting up your passive income sources, the more you can benefit from the effect of compounding over the years. With that said, having an income strategy may not be for everyone: it can require a substantial initial capital output, take up a lot of your time to set it up, and may lock up your funds for a period of time. Before embarking on an income strategy, always consider if it makes sense for you and if so, which strategy is most suitable for you and your personal circumstances.
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