What Is Passive Income And How Can You Generate It?


It's never too early to begin planning your future. If your ultimate financial goal is to retire early and enjoy life, or to be better prepared for your children's future, the sooner you begin building wealth, the better. Although setting aside a portion of your hard-earned pay on a monthly basis is a good start toward building wealth, you're essentially limited by your ability to save.


What is Passive Income?

Creating “set it and forget it” revenue sources that magically produce additional income on a daily basis is not what passive income is about, despite what you might have read. It's all about putting money into something that will continue to pay off with little effort. Remember that there is no such thing as "no effort" passive income. Such investments do necessitate some level of supervision.

How Can You Earn Passive Income?

1. Dividend Stocks

One of the easiest ways for investors to generate passive income is by dividend stocks. When a public company makes a profit, a part of that profit is siphoned off and distributed to shareholders in the form of dividends. Investors have the option of keeping the money or reinvesting it in more shares.

Dividend yields can differ dramatically from one company to the next, as well as from year to year. If you're unsure which dividend-paying stocks to buy, look for those that have a dividend aristocrat rating, which means the business has paid out substantial dividends for at least 25 years.

2. Investment Funds

People who want to generate passive income with their portfolio also turn to mutual funds, exchange-traded funds (ETFs), or unit trusts. This investment eliminates the stress (and risk) of purchasing stocks on your own: instead, the fund invests on behalf of the fund participants in a number of stocks or other publicly traded items.

Investment funds, including dividend stocks, do not pay out cash to investors. Rather, they will diversify their portfolios by including stocks that are likely to pay a dividend to shareholders. You get a slice of the pie because you're an index fund shareholder, which means you get more value for your money.

An investment manager manages mutual funds either passively or actively, and then takes a percentage of the fund's returns. When you invest your money into a mutual fund, you will take a more hands-off approach to managing an important part of your portfolio. The assets and size of the investment are chosen by the fund manager; all you have to do is watch your investment's returns and the fund's overall performance.

3. Bonds

The issuing of bonds is a way for governments and corporations to collect money to finance their expenditures. Bonds, unlike stocks, do not give you equity in the business.

A bond, on the other hand, is a guarantee from the government or a corporation to repay you the amount lent plus interest for a set period of time. A coupon is the term for the interest you get on a semi-annual basis. The principal is the lump sum that must be repaid when the bond matures. In Singapore, coupons are also not taxable.

The amount of passive income you can get from a bond is determined by its coupon rate. The issuer's credit rating (likelihood of the government/company defaulting) and the period have an effect on the coupon rate (time taken for the bond to mature).

The higher the coupon rate, the lower the credit rating and the longer the bond's length, as the bond issuer would have to pay you more to take on the risk.

Bonds, like stocks, have a downside of concentration risk when it comes to passive income. You're also less likely to diversify through several bonds and get liquidity with wholesale corporate bonds selling at S$250,000 lots. You may be enticed to invest in bonds with the highest coupon, but you'll end up taking on too much credit risk as a result.

Analysing the credit risk of a company is complex process, which is why financial advisors like ourselves can assist you with doing so.

4. Annuities

Retirement plans or annuities, a common income investment product recommended by insurers, provide an appealing combination of guaranteed returns, insurance, and even higher non-guaranteed returns. These goods have a consistent income stream during retirement. You pay premiums during your working years, either in one lump sum or on a daily basis, and start receiving payouts at a certain age.

The versatility of private annuities is an asset. You can customize these items to meet your specific requirements. Do you want to retire early? It is possible to locate a commodity that begins at the age of 55 or even earlier.

5. Rental Income

It's possible to create passive income by renting out a spare room (or even two) in your home if you don't mind living with others. You can receive up to $2,000 a month per room depending on where you live (Central, East, etc.), the type of property (HDB, Condo, etc.), and the facilities offered (utilities, bathroom, etc.).

If you own a HDB flat and want to rent out a bed, there are a few things to bear in mind. You must meet the HDB's eligibility requirements which include a 5-Year Minimum Occupancy Period, and if your flat is not subsidised, there is a 3-Year Minimum Occupancy Period. There is also a maximum capacity of 4 tenants in each flat if it is a1-room or 2-room flat, and a maximum capacity of 6 tenants if the flat has 3 or more rooms. The conditions are slightly different if you own a private residential property. Under the rules of the Urban Redevelopment Authority (URA), you can have a maximum of six unrelated people per property and a three-month minimum stay for each occupant.

Apex EP is an authorised group of Financial Adviser representatives from Professional Investment Advisory Services Pte Ltd.