assive income is money you make with minimal time and effort – it’s when your money or your assets effectively work on your behalf to boost your income.
Broadly speaking, passive income comes in three guises:
Here are some of the best ways to earn passive income in 2022.
Remember that investing puts your capital at risk – you may lose some or all of your money.
Choose from a wide range, covering ETFs, Investment Trusts & Stocks
Your capital is at risk, please be aware the value of your investment can go down and you may get back less than you invest.
If you have funds to invest in shares, the companies whose shares you buy m
ay pay dividends to shareholders based on their performance. Dividends aren’t guaranteed (either in terms of the amount you’ll get or even whether you will be paid at all), but they can provide a good passive income stream if you have the right shares in your portfolio.
The amount you receive is known at the dividend yield, which is calculated by dividing the company’s share price by the annual dividend. For example, if a company is paying annual dividends of £5 and has a share price of £100, the dividend yield is 5%.
As well as company shares, you might also receive dividends from investment trusts and funds.
Companies that pay dividends typically pay out in cash, once or twice a year. Special, one-off dividends are sometimes paid when, for example, a business is sold.
In 2021, more than one trillion pounds was paid out in dividends globally – a record high. However, not all companies pay dividends. For example, Meta (Facebook’s parent), Tesla and Amazon haven’t paid out dividends – instead these companies have invested the money in growth plans.
Traditional ‘blue chip’ companies such as GSK or BAE Systems, on the other hand, tend to pay out higher dividends. Investment platform AJ Bell predicts total dividends from the FTSE 100 of more than £80 billion in 2022. As of this month, the index’s dividend yield stands at 3.7%.
Take care with companies with high dividend yields, however, as figures can be artificially inflated by sharp falls in share prices.
Investment trusts invest your money in assets such as shares, and most pay dividends to investors. Investment trusts have a trading price that can go up and down according to demand.
Data from the Association of Investment Companies shows that seven investment trusts have increased their dividend payments each year for the last 50 years.
It’s important to look at a trust’s dividend yield when you’re deciding where to put your money, but you should also consider other factors, such as the trust’s prospects for growth.
Like investment trusts, funds contain an assortment of shares and other assets. Unlike trusts, however, they do not have a ‘live’ price that changes according to demand.
Instead, funds are re-priced once a day based on the values of the assets they contain.
Many funds pay dividends in addition to capital growth. Those funds whose primary focus is to pay an income can be found in the UK and Global Equity Income categories.
Most UK Equity Income funds pay a dividend yield of between 3% to 5%, according to investment information provider Trustnet.
Interest on your savings is a form of passive income. Easy access savings accounts are currently paying up to 1.6%, while regular savings accounts are paying up to around 3.5%.
The returns are lower than you might receive from investing in stocks, shares and other assets, but the risk is also lower. Most savings accounts are protected by the Financial Services Compensation Scheme, which safeguards up to £85,000 of customers’ money (per financial institution) if a bank or building society goes bust.
Fixed rate bonds can offer competitive rates of interest if you’re willing to give up access to your money for extended periods of time. Some accounts will pay 3.3% when you lock in for five years.
Premium Bonds are another alternative. Rather than paying interest, they give bond holders the chance to win tax-free, cash prizes of between £25 and £1 million each month.
There’s a 34,500 to one odds of winning a prize per £1 bond, equivalent to a 1.4% interest rate, according to National Savings & Investments (NS&I), which issues the bonds.
However, with inflation currently at a 40-year high of around 9.4%, any savings account paying out less than that in interest is effectively losing money.
Though it involves the biggest financial outlay and commitment, investing in property can generate some of the most significant passive income.
It can be hard work and expensive, given the required maintenance and management of the property, however.
Property yields are the best measure of income from a property. Yields are calculated by dividing annual rental income by the property’s purchase price.
Property developers SevernCapital says property yields in 2021 ranged from 2.9% in London to 4.4% in the north west. NatWest, a buy-to-let lender, says a reasonable property yield is between 6% and 8%.
When you factor in fees or costs for property maintenance and management, a property yield can be lower still. However, with property prices tending to trend upwards over time, there may be benefits to investing in property over the longer term.
Choose from a wide range, covering ETFs, Investment Trusts & Stocks
Your capital is at risk, please be aware the value of your investment can go down and you may get back less than you invest.
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