The best passive income ideas for 2023
The current cost of living crisis is encouraging people to find additional sources of income to cover rising food, petrol and energy bills. So-called “passive” income can be a good way to multiply your family’s earnings and provide a safety buffer when financial resources are limited.
Fortunately, the pandemic has opened up innovative ways and an increasing number of passive income options that will enable you to earn extra money. Let’s take a look at it.
Passive income refers to income that does not require a large commitment of time or money. Although most passive income ideas require some initial time, money, or resources, they are minimal. There are three main types of passive income streams:
Investment: Achieving a return from investing money in savings or stock accounts.
Asset sharing: Selling or renting assets you own, such as your home or car.
Building assets: Examples could include adding income-generating affiliate links to your blog or website or selling products such as e-books, educational content, music and photos online.
The best passive income ideas
Dividends from investments
Dividends are paid by companies to their shareholders and can provide good passive income if you have money available to invest. However, it is not guaranteed and many companies have temporarily suspended their dividend payments during the pandemic.
Similar to the annual rate for a savings account, the dividend yield is a good indicator of the “return” of your investment, and is calculated by dividing the dividend by the share price. If a company with a share price of £100 pays an annual dividend of, say, £4, the dividend yield will be 4%.
There are three main ways to earn a dividend stream from investments:
There are many companies that pay dividends to shareholders. Dividends are usually paid in cash on a quarterly or semi-annual basis. D Some companies also pay a one-time “special” dividend to return cash to shareholders.
Global equity profits jumped to a record £1.2tn in 2021 thanks to a boom in dividends paid by mining companies.
There may be a trade-off between dividend payments and stock price growth. “Growth” stocks such as Tesla, Amazon, and Meta do not pay dividends, but rather invest surplus cash to generate future growth.
Good companies tend to pay very high dividends, Investors’ Chronicle reports that the average dividend yield for the FTSE 100 and Nasdaq is currently 3.3% and 0.7%, respectively. However, caution must be exercised in cases of very high-yielding stocks, as this could be the result of the dividend yield being artificially inflated due to a sharp drop in the share price.
Mutual funds invest in assets such as stocks, and the majority of funds pay dividends to investors. As with stocks, mutual funds have a “live” trading price that can go up or down depending on demand.
The benefit of mutual funds is that they are allowed to keep 15% of annual income to build up a cash reserve, which enables them to maintain steady dividend payments in downturns.
As with stocks, dividend yields must be taken into consideration along with other factors. There are a variety of investment funds that you can choose from, including equity income trusts and trusts that focus on different sectors such as technology, property and commodities, along with different geographic regions.
Funds are similar to mutual funds in that they own an actively managed portfolio of stocks and other assets, but the difference is that the funds do not have a “live” price and are re-priced once a day based on the value of their underlying asset.
When purchasing funds, you may be offered a choice of income or accumulation units. Income units pay cash dividends to investors, while accumulation units use dividends to purchase additional units in the fund, allowing for future capital growth by reinvesting the dividend.
Interest from savings accounts and bonds
Depositing your money into a savings account can also help you get passive income. Accessible savings accounts currently pay up to 1.2%, while the leading regular savings accounts offer rates of up to 2.0% although these usually have a monthly limit of between £100 and £500.
Make sure you check the interest rate on a regular basis as it may include a bonus rate for a limited time, and that you check your account is covered by the Financial Services Compensation Scheme, which guarantees clients up to £85,000 in the event of a bank failure.
Although investing in savings accounts is less risky than the stock market, the average return is also lower. Given the current inflation rate of 7%, money invested in savings accounts that pay an interest rate of 1% would actually lose 6% in real terms each year.
Fixed-rate bonds are another option if you’re willing to tie your money up for a longer period. Some of the major fixed rate bonds offered by banks pay up to 2.4% fixed rate for two years or 2.6% for five years fixed rate.
Premium Bonds offer holders the chance to win prizes from £25 to £1m per month tax-free. You can withdraw your funds at any time by cashing in all or some of your securities.
There is a 34,500 to one probability of winning a prize for each £1 bond, which equates to an interest rate of 1.0%. This rate is currently just below the leading easy-to-access savings accounts. But remember that there is no guarantee that you will win a prize.
Income from property
Investing in real estate can generate significant passive income, either from long-term rentals or short-term vacation rentals. However, this option involves significant upfront investment capital, as well as ongoing maintenance and property management.
The return on property is used as a general rule for estimating the annual return on a property, and is calculated by dividing the annual rent divided by the purchase price. However, the yield varies by region, with average property yields in 2021 ranging from 2.9% to 4.4% in London, while holiday packages may offer higher potential returns. Yield generally depends on the number of weeks the property is rented per year and additional management fees.
Although significant capital is required to invest in real estate, it is possible to generate passive income from investing small amounts of money in savings accounts and stock investments. As with any investment, you should consider the level of risk associated with it and whether you are able to absorb any losses.
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