[VIDEO] How do I get stable passive income?
Question:
How do I get stable passive income?
Answer:
Passive income is when you receive a regular payment from an investment that you don’t have to work on.
There are four major types of investments that you can derive income from.
1. The first is property, the one most loved one by Australians.
2. Second is shares in Australian or international companies listed on the stock exchanges or privately owned
3. Cash and term deposit-like investments
4. Fixed interest, or bonds.
It is possible to invest in all of them at the same time. You design a ‘portfolio of investments’ and split your money between different percentages in each.
There are some other types of investment available, but most of them are the derivatives of this main four.
Most investments have two components to their return.
1. Growth – which is how much each investment goes up and down in value
2. Income – which is how much you receive from the investment on a regular basis. This is what we call passive investment income.
So, to understand how to get income from an investment, we need to understand how the different investments work.
Let’s start with property.
One of the benefits of investing in property is that it is a tangible asset. You can see it, touch it and you know that it’s there.
When you buy a property, you invest a large amount of money in one asset. By borrowing money to purchase property, your potential to achieve greater returns is higher because of the larger amount of money that you are able to invest.
Let me lead you through an example:
In terms of growth, on average the Melbourne residential property market has grown at approximately 6.2% per annum over the last 20 years (source: La Trobe financial 2019).
The current rental residential property yield or rental income is approximately 3% per annum.
According to CoreLogic, Melbourne's gross rental yield is now at 2.7 per cent, the lowest in the country, with Sydney at 2.9 per cent. (Jan 15, 2020)
So, if you invest in a property that is worth $500,000, your income from the property is going to be: $500,000 x 2.7% = $13,500 pa or $1,125 pm.
So to earn $52,000 pa in income, you will need to own four houses.
Other types of property investments are industrial, commercial or property trusts.
Now to Shares.
You can start with a very small amount of money to invest in shares. Similarly to property, some shares have income called dividends. In Australia, we also have a benefit of franking credits. https://www.ato.gov.au/Non-profit/your-organisation/investments,-credits-and-refunds/franking-credits/
The Australian share market currently provides investors with an average dividend yield of approximately 4%. (Jan 3, 2020) Given the low interest rate environment that we're living in, this certainly is a blessing.
The grossed up dividend yield with franking credits is approximately 5.4% pa
Compare that to S&P 500 of 2.5% pa
Over the past 20 years shares, have returned 8.8 per cent per annum. Over rolling 40-year periods - which are representative of the working years of a typical person - share returns have been remarkably stable, sitting in a range of around 12 per cent. That return includes dividend income. https://www.asx.com.au
Cash and Bonds
As you most-likely know, currently cash and bonds don’t really provide much income because of our very low interest rates.
It’s a complex situation because today’s interest-rate is low. But if you need your portfolio for very long period of time – to complete retirement - then you will need to construct your investment in a way that is going to last you throughout your life, so you are able to focus on income that you receive from your portfolio. Growth is very important too.
So how do we start building a portfolio that is going to provide us with that level of passive income?
The answer to that is ‘the earlier the better’. Due to the compound interest principle, the value of your portfolio can go up significantly over a long period of time, particularly if you reinvest your income.
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