Imagine a day where you can sit back and just watch the money roll in. That’s the allure and promise of passive income investing.
Unlike growth or value investing, income investing focuses on generating income from your investments. While you may expect a reasonable payout on a regular basis from your passive income investments, you should not expect explosive growth. This is not Tesla or Bitcoin which can bring you multi-bagger returns (and volatility).
Instead, the key to passive income is building it to a sufficient amount by continuously adding to it and reinvesting all the returns until a point that we accumulate enough to be able to survive an entire year on the annual returns of our passive income investment.
Here are 10 popular ways you can generate passive income in Singapore.
Read Also: Guide To Value Investing In Singapore
#1 CPF Life
CPF Life is not one that pops into our mind when we think of passive income. However, CPF Life is a passive income investment that every Singaporean has.
In essence, CPF Life is a government-mandated life annuity for all Singaporeans, providing a monthly payout (after the age of 65) for their lifetime. Depending on whether we choose the Basic, Standard or Escalating Plan, our payouts and eventual bequest will differ.
Based on the Full Retirement Sum of $205,800 for those who turn 55 in 2023, we can expect a monthly payout of about $1,670 for life on the Standard Plan. Unlike private annuity plans where there is a possible risk of the insurer defaulting or the non-guaranteed portion of the payouts falling short of expectations, CPF Life payouts are guaranteed by the government.
#2 Singapore Savings Bonds (SSBs)
The Singapore Savings Bonds (SSBs) are bonds issued every month by the Singapore government via the Monetary Authority of Singapore (MAS). There is a low minimum investment of $500, the capital is guaranteed and you can easily withdraw your capital anytime. SSBs can be a good way to diversify your passive income sources.
For the December 2023 SSB issuance, the interest rate is 3.4% p.a. for holding it to the full 10-year period. As the interest rate environment increases, the higher return makes this investment an attractive “risk-free” investment.
#3 Retirement Plans Or Annuities
A popular income investment product recommended by insurers, retirement plans or annuities offer an attractive mix of guaranteed returns, protection and even greater non-guaranteed returns. These products provide a regular payout during retirement. You pay for premiums, either through a single premium or regular premiums during your working years and receive payouts from a certain age.
The advantage private annuities have is their flexibility. You can structure these products to best fit your personal needs. Want an early retirement? It is possible to find a product that starts at 55, or even earlier. However, having a portion of the investment going towards protection can dilute future returns.
Understand the policy details before you commit to one of these plans. There is typically a high penalty for early termination. Here’s a detailed analysis of how to read a benefit illustration.
The guaranteed principal and regular payouts make bonds attractive to passive income investors. However, the “guarantee principal” is still tied to the bond issuer’s ability to repay the debt. Some investors may recall the Swiber bond default in 2016, where bondholders were unable to recover their interest or principal repayments.
Typically, corporate bonds have a higher coupon yield than government bonds and bank deposits. Most corporate bonds are traded on Over-The-Counter (OTC) markets. A small subset is traded on the exchange. These are also known as retail bonds. Popular ones include Temasek bonds and Astrea bonds.
#5 Fixed Income Exchange-Traded Funds (ETFs)
Fixed-income ETFs invest in a diversified basket of fixed income assets, typically bonds.
As an investor, we can choose to invest in various fixed income ETFs based on the type of market or sector we want exposure to. Some of the fixed income ETFs listed on SGX are traded in both Singapore Dollar (SGD) and US Dollar (USD) so investors have a choice on which currency to invest in.
Currently, the 10-year annualised return of the ABF Singapore Bond Index Fund ETF which invests in a basket of high-quality bonds issued primarily by the Singapore government and quasi-Singapore is 1.10% while the return since inception of Nikko AM SGD Investment Grade Corporate Bond ETF, which invests in investment-grade corporate bonds, is 1.25%.
#6 Real Estate/ Rental Income
A Singaporean investor’s favourite is rental income. Most Singaporeans think that owning a second property and renting it out is an assured way of getting income.
However, it may not be as passive as we may think. Getting a steady stream of rental income requires skill and luck in finding a good long-term tenant(s). Once we account for all the upkeep, administrative and maintenance work, this may be more effortful than we think. Outsourcing to an agent may be possible but would eat into our rental returns.
Renting out a 4-room HDB flat in Ang Mo Kio would bring us about $2,900 in monthly rental income before expenses. If you don’t already own one, buying a 4-room HDB flat in Ang Mo Kio would cost about $555,000. However, you would be subject to HDB’s buyer eligibility and rental restrictions; you would not be able to rent out the whole flat until after the 5-year Minimum Occupancy Period is completed.
#7 Real Estate Investment Trusts (REITs)
REITs are essentially property investments and allow investors to access property investments in Singapore and other major property markets by pooling our monies to invest in a diversified portfolio of properties.
Aside from investing into individual REITs, investors can also choose to invest in multiple REITs through REITs ETFs, unit trusts or robo-advisory services such as Syfe REIT+.
As an asset class, REITs are mandated to payout 90% of their earnings as distributions to its unitholders. This is why many REITs have a relatively high distribution yield.
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#8 Mutual Funds Or Unit Trusts
Mutual funds (sometimes known as unit trusts) are professionally managed investment funds that pool money from investors to buy securities which can be any tradeable financial asset (not just equities). Some mutual funds may be designed to track a particular index while others are actively managed by fund managers to achieve a certain investment objective such as to beat the market returns.
Depending on the fund manager’s focus, you can find mutual funds that focus on income investment and generate a strong regular payout through a mix of bonds, REITs and other fixed-income assets. Some may even include an equity component to increase the potential return.
However, watch out for fees. Some mutual funds charge high fees which can eat into your returns especially when compounded over time.
Robo-advisors are digital platforms that utilise automated solutions and algorithms to help us invest and manage our money. Similar to mutual funds and ETFs, robo advisor platforms pool together funds from many smaller investors to make large and diversified investments.
Currently, there are a few robo-advisors that offer products with a focus on income generation. Some notable ones include StashAway’s Income Portfolio and Endowus Income Portfolios, which offer monthly payouts based on different income and growth needs. Alternatively, another option is Syfe’s REIT+ which focuses on only REIT investments offers a 5.82% dividend yield in 2023, and has delivered a cumulative return of 15.61% over the last 5 years.
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#10 Dividend Stocks
Dividend stocks are another source of passive income available to investors. However, it does have the potential to be more variable as dividend payouts can be cut depending on the company’s performance and economic variables.
For example, in 2020, MAS regulated a cap of bank dividends to 60% of that in 2019. This resulted in a dividend yield of 2.7% to 3.1% for the 3 major banks, DBS, UOB and OCBC) in 2020.
Aside from blue-chip stocks that are known for their dividend yields such as bank stocks, investors can also screen for listed stocks that payout high dividends. However, as stocks do not offer any capital protection or guarantee, investors should pay more attention to the company fundamentals to see if the dividends paid out in a sustainable manner.
Passive Income Investing Does Not Equate To No Risk
Passive doesn’t mean no risk. Just like any other investment, the more risk you take, the higher your potential return. Your choice of passive income investment should depend on your own risk tolerance. Be wary of any passive income investment that promises high returns, it could be a scam or be riskier than you think.
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