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Amid the current cost-of-living crisis, many Australians are seeking additional sources of income to help cover rising expenses for essentials like food, petrol, and energy. With inflation hitting 7.8% in 2022 and remaining stubbornly high at 5.2% in August 2023, alongside a significant increase in interest rates from 0.1% to 4.1% over the same period, household budgets are under intense pressure. Additionally, the end of the petrol excise cut and sharp increases in energy bills have only compounded the financial strain.
In this challenging economic environment, passive income streams offer a potential solution for those looking to supplement their earnings without the need for a significant time or resource commitment. Here's a closer look at what passive income entails, how to explore various investment options, and some popular avenues for Australians to consider.
What is Passive Income?
Passive income is money earned with minimal ongoing effort. While it usually requires an initial investment of time, money, or assets, it should need little maintenance once established. There are three main categories of passive income:
1. Investing: Earning returns from investments in high-interest savings accounts, term deposits, or the stock market.
2. Asset Sharing: Renting or selling assets you own, such as property or vehicles.
3. Asset Building: Creating revenue-generating content or products, such as blogs, eBooks, or online courses.
Each of these can be a viable way to generate additional income, depending on your resources and financial goals. Here are some popular passive income options in Australia.
- Dividends from Investments
Dividends are payments made by companies to their shareholders and can provide a reliable passive income stream. Australian companies, known for their liquidity, offer relatively easy trading opportunities.
- Dividend Yield: This is the return on your investment, expressed as a percentage. For example, a company with a share price of $100 that pays an annual dividend of $4 has a dividend yield of 4%. While some companies offer yields of 10% or more, it's important to be cautious—especially if a high yield is due to a falling share price, which could indicate underlying issues.
- Company Shares: Australian companies typically pay dividends twice a year. Shareholders must own the shares before the 'ex-dividend' date to receive payment. In Australia, shareholders also benefit from franking credits, which prevent double taxation on dividends.
- Investment Trusts: These trusts invest in assets like shares and pay dividends to their investors. Options include Real Estate Investment Trusts (REITs), which allow investment in commercial property sectors such as retail and industrial spaces without the need to manage physical properties.
- Managed Funds: These involve pooling money with other investors, with a fund manager overseeing investments in various assets. Managed funds can be actively managed or passive, such as exchange-traded funds (ETFs) that track indexes. They are accessible with a relatively low initial investment and can offer regular income.
- Interest from Savings Accounts and Bonds
- High-Interest Savings Accounts: With interest rates rising post-pandemic, high-interest savings accounts now offer more attractive returns. Some accounts, particularly bonus savers, can pay around 5% interest, but it's important to review these regularly to ensure you're getting the best rate.
- Government Bonds: These are low-risk investments that pay regular interest and are indexed against the CPI to protect against inflation. They can be bought and sold on the ASX.
- Company Bonds: These offer higher returns than government bonds but come with higher risk, as they depend on the financial health of the issuing company. If the company goes bankrupt, bondholders are prioritized over shareholders for repayment.
- Passive Income from Property
Investing in property can provide significant passive income through long-term rentals or short-term holiday lets. However, this requires a substantial initial investment and ongoing maintenance. Australian property investors benefit from tax breaks, including negative gearing and a discount on Capital Gains Tax (CGT) for properties held for over a year.
