“How do I invest for passive income?” is a common request among savers. They are mostly people who don’t want to be trading shares all day, or watching the markets, but would much prefer the “slow and steady” approach to investing.
That sounds dull but there’s nothing remotely trivial about long term conservative investing, and it’s even less trivial to look for a steady return.
So, do you stash your savings under the bed? No. They’re safer in the bank although the interest rates currently on offer are hardly very exciting.
For instance one of the more generous ones, Citibank, is currently offering 2.8 per cent a year but you have to deposit a minimum of $100,000.
And rates are not going to go up by any sizeable amount in the near future. The Reserve Bank has held its bellwether official target rate steady at 1.5 per cent since August 2016 and clearly has no desire to be pushed into lifting it any time soon.
So, what about property? Property has long been a favourite in Australia and it’s generally accepted that a fair return from a residential investment in Australia, in terms of annual income, is around four per cent.
The big returns from property come of course from capital gain, which can be massive (particularly if you have held it for the last five years or more) but can vary more than you think depending on when you buy and sell.
The main challenge with property is that it is illiquid; meaning, hard to sell quickly. It’s called a lumpy asset.
The fixed interest market is a good place to go for passive income. It’s actually bigger by value than the share market, and generally a lot safer, if less volatile. Government bonds are particularly expensive (and thus have low yields) and are hard for retail investors to access but there are now bond funds being created to make it possible for normal investors to earn a reliable income stream of around 5 per cent a year and sometimes more, from higher yielding issues in the fixed interest market. Brisbane based specialist FIIG is one of the leaders in the field.
A useful innovation in recent times has been the creation of managed funds paying monthly distributions. Previously, they only paid out twice a year which does not match the way bills arrive. In the case of the eInvest Income Generator Fund (ASX: EIGA), launched in May 2018, it aims not only to provide a return of 5 per cent per annum but also the additional benefit of franking credits which can add 2 per cent to the return.
The universe of products and schemes paying out reliable and worthwhile financial returns is growing by the month. And we haven’t even mentioned renting out your spare room via AirBnb!
For more detail, please see the relevant Product Disclosure Statement (PDS) for the active ETF you are interested in. This article is the opinion of the author and is not financial advice. Speak to your financial advisor or broker for more information. I’m sure they’ll be happy to help you.