5 ways to get smart passive income
It is everyone's dream to have a stream of passive income — whether to supplement your current salary, or to support you through your retirement years. A source of passive income is especially important if a situation hinders you from continuing your day job. How can you make your money work for you, without too much time and effort? These five areas will help you on your journey towards generating passive income.
1. Invest according to your risk appetite
Investments in various financial instruments are a key part in generating a healthy passive income flow. As for what you should start investing in, first assess your risk appetite. Financial products are designed for a multitude of different risk appetites, so you should evaluate your own investment profile to prevent placing your hard-earned money into investments that may not be suitable for you.
Once you know how much risk you are willing to consider, you can then look into the different investment opportunities. For choices that are evergreen, look no further than government bonds. While returns are not as high, they do carry significantly less risk than investing in companies.
If you can stomach the risk, however, consider the exciting opportunity to help finance the next unicorn startup. There are funds that actively seek out and evaluate startups that could carry the potential to be the next global success story. While some options are more tempting than others, check with your financial advisor if your plans match up with your risk appetite.
2. Build up your dividend-paying stock portfolio
Once you establish your investment profile and financial objectives, you'll be able to build your own dividend-paying stock portfolio more wisely. Depending on your goals, you can choose from a wide range of companies delivering a mix of higher but riskier returns, or stocks in blue chip companies that promise a slower but more stable outlook.
The stock market might require a bit more attention and monitoring as compared to other financial products though, so do consider if you have time to monitor your holdings. If not, look into Exchange Traded Funds (ETFs) as an alternative. Instead of monitoring individual stocks, you only need to check the market index as a whole – a safeguard against investments that may be more volatile.
3. Leave it to the experts through unit trusts
If you are seeking a constant source of passive income with less monitoring than the stock market, unit trusts might be for you. Unit trusts are managed by experienced fund managers, who are able to provide support in research and other investment opportunities that would otherwise be less accessible to the personal investor. Look out for share classes that can provide you with regular payouts on a monthly, quarterly, or semi-annual basis.
In addition, you’ll find greater variety with unit trusts and diversify your risk amongst the many hundreds or thousands of companies that are within a unit trust, instead of just a handful of companies that you’ve invested shares in. Also, you can invest with CPF or SRS funds so it won’t affect your cash position if you are tight on cash. Using SRS funds also makes you eligible for a lower sales charge.
4. Co-own major properties via REITs
Singaporeans have a deep and enduring love affair with property investments. With the advent of Real Estate Investment Trusts (REITs), investing isn’t as expensive as purchasing a property on your own. REITs are portfolios consisting mainly of commercial properties such as malls and hotels. Proceeds from the income are then shared with the investors, including REIT shareholders potentially such as yourself. S-REITs are required to distribute at least 90% of their annual rental income as dividends to unitholders, and these dividends are usually paid out at least twice a year, making REITs a good source of regular/consistent income. Like unit trusts, REITs allows you to spread the risk of investments, while having it professionally managed as well.
5. Start with baby steps for your first investment
Regardless of your type of investment, know that everybody has to start somewhere. If you are a rookie investor, don’t feel left out! You can build a passive income portfolio, starting by reserving a small portion of your monthly salary for investments. With each monthly contribution, plus any earning from your returns (like dividends), you can then increase your investment budget and further diversify your portfolio. To start trading, consider applying for a DBS Vickers account online.
All things considered…
Just like setting up a business, developing a steady stream of passive income involves patience and knowledge. And contrary to what you might think, your chances of increasing your passive income are better at the prime of your career, and starting out early gives you the benefit of compounding interest. No matter which methods you prefer, review your portfolio from time to time to ensure that your money is working as hard as you are!