As an older investor (I’m a 55-year-old, Gen X guy), I’ve become a big fan of passive income. I love this form of earnings because it comes from activities other than paid work. Plus, I like the idea of my money working harder so that I don’t have to.
Powerful passive income
In order to spread my risk, I’m looking to various forms of passive income to boost my earnings. Also, one bonus is that unearned income doesn’t attract NICs (National Insurance contributions), so it can be taxed more lightly than earnings from working.
Here are my top five forms of unearned income, from most to least favoured:
1. Share dividends
Currently, my family’s biggest source of non-work income comes from share dividends. These are cash payouts made by some companies to their owners (shareholders).
Alas, dividends are not guaranteed, so they can be cut or cancelled at any time. Also, most London-listed companies don’t pay dividends, though almost all FTSE 100 firms do.
My wife and I built a new, stand-alone portfolio of 27 stocks from July 2022 to August 2023. Today, it gives me great pleasure to watch thousands of pounds of extra cash flooding into this pot each quarter.
2. Pensions
I’m over 55, which means that I’m free to access the mixed bag of company and personal pensions I’ve built up since starting work in 1987. These include two final-salary occupational pensions that are surprisingly valuable nowadays.
So far, I have resisted the temptation to withdraw tax-free cash from these funds, plus I haven’t yet drawn any income from them. But I fully intend to do so in my 60s — a decade that looms larger every day.
3. Bond coupons
Bonds are debt securities (IOUs) issued by governments, companies, and other groups. Via regular payments known as coupons, they pay a fixed rate of interest for a defined period. When they mature, they return the initial investment in full — if they don’t default beforehand, that is.
I’ve had 0% exposure to bonds in recent years, thanks to their incredibly low yields. However, with interest rates surging since early 2022, they look much more attractive to me today. Therefore, I might just buy some UK-issued bonds in 2024, or simply invest in a low-cost bond fund.
4. Savings interest
My cautious wife keeps a pile of cash as our family’s emergency fund. At present, it’s possible to earn 5%+ a year from the best easy-access savings accounts, or closer to 6% through fixed-rate savings bonds.
While that’s way better than the near-zero rates that prevailed until early 2022, most savings accounts are taxable, reducing my returns. So I don’t keep much cash on deposit, preferring instead to risk my money for higher long-term returns.
5. Property income
My least favourite form of passive income is the rental income that comes from letting property to tenants. I’ve never been a buy-to-let landlord, nor do I imagine every becoming one.
As a laid-back bloke, I would hate to have to maintain and repair any property other than my own home. Nevertheless, tens of thousands of Brits have become rich from following this strategy. It’s just not for me!
The post My five favourite forms of passive income appeared first on The Motley Fool UK.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
