As I get older, I get very enthusiastic about passive income — the earnings I accrue outside of paid work.
I have many options for grabbing these earnings, but find some rather unappealing. Here are five leading forms of extra income that I’m currently considering.
1. Savings interest
Perhaps the most straightforward and widely used passive income. I simply deposit money in a high-yield savings accounts and collect the interest. With the Bank of England’s base rate at 5.25%, table-topping savings accounts pay 5%+ a year, before tax.
However, I’ve met very few people who got rich solely by keeping their money in banks. Also, the taxman takes a chunk of my savings interest, so I’m not mad keen on this route.
2. Bonds
My second option could be to buy bonds — IOUs issued by governments, companies and other organisations. These pay me interest in the form of ‘coupons’, then later return my initial investment when they mature.
However, some bonds (say UK Gilts and US Treasurys) are safer than others, while struggling companies sometimes default on their bond payments. Perhaps I’d be better off investing in a broad-based, diversified bond fund? This is something I’m actively considering right now.
3. Property
My third choice might be to become a buy-to-let (BTL) landlord, buying houses or flats and then renting them out to tenants. In my experience as a former tenant, this can be hard work at times. Hence, I’m reluctant to become a ‘BTL baron’ later in life.
An easier alternative is the government’s ‘Rent a Room Scheme’, which lets me earn up to £7,500 tax-free each tax year by letting out a room in my own home. However, I’m sure my wife wouldn’t agree to this, so I’ll also reject this.
4. Pensions
In 37 years of work, I have amassed a jumbled collection of various personal, company and state pensions. As I have reached 55, I could access these pots for income or lump sums. But I think it’s too early for me to do this yet, so I will leave them alone for now.
5. Share dividends
Cash dividends from stocks and shares are by far my favourite form of passive income. Though these payments are not guaranteed, dividends are my family’s second-largest income (after paid work).
For example, my wife and I own shares in FTSE 100 firm Legal & General Group (LSE: LGEN) as part of our family portfolio. While previously working in the insurance and investment world for many years, I became an admirer of this long-established company, its sound business model and solid management.
At the current share price of 242.8p, L&G is valued at £14.5bn, making it a Footsie stalwart. However, its shares are down 2.5% over one year and 12.4% over five, excluding dividends.
Share-price falls have lifted L&G’s dividend yield to a tidy 8.4% a year — almost twice the FTSE 100’s yearly cash yield of 4%. This high (and steadily rising) income is my #1 reason for owning this stock.
Then again, with £1.3trn of client assets under management, L&G shares can and do fall when share prices drop, as happened in Covid-hit 2020. And like all stock, its price can be volatile. Still, we are holding these shares for the long run!
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Cliff D’Arcy has an economic interest in Legal & General Group shares. The Motley Fool UK has no position in any of the shares mentioned. 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.
