“If you don't find a way to make money while you sleep, you will work until you die.” 

– Warren Buffett

Why build a passive income stream through investing? 

Generating passive income streams has been popular for people who seek financial stability without having to put in as much time and effort as they would with a full-time job or freelance gig. Unfortunately, retrenchment has become more frequent affecting even younger employees, highlighting the need to diversify our income sources. 

Investing is one way to generate passive income, but first, it involves some initial legwork to plan your finances. For instance, dividend investing requires research to identify stable, high-yielding stocks. However, once established, these income streams can provide regular payouts with minimal active involvement, allowing you to focus on other priorities while your money works for you.

What’s the best investment strategy for generating passive income?

As everyone’s financial situation is unique, financial priorities vary for individuals at different stages of life. Those approaching their golden years will have retirement on their minds and prioritise more stable payouts, while younger investors with longer time horizons may pursue more aggressive growth opportunities.

There are several key things to look out for when deciding on a passive income strategy:

• Ability to overcome inflation risk — Inflation is one of the primary risks for income investors, as it diminishes the real value of your investments’ principal. Some passive investments promise a fixed stream of payments, but the fixed dollar amount may not be adjusted against rising inflation. So, even as you collect payments and receive your principal back at maturity, your purchasing power is chipped away by rising prices. Investing in inflation-linked investments can help mitigate this. 
• Are your long-term financial goals covered? — While passive income is important for covering day-to-day expenses, it’s also essential to consider long-term financial goals, such as retirement or major expenses. Without capital appreciation, it may be challenging to accumulate wealth over time using a portfolio with a sole income focus.

• Diversified sources of income — Relying on a single source of income, generated by an individual company stock, for example, can be risky, as any disruption or decline in that particular source can significantly impact your overall income. Unit trusts are diversified investments into multiple companies, which help lower volatility and investment risks. Passive income goes beyond these common examples, and it is important to stay diversified to prevent overlooking any opportunities. 

For an overview of income investing and its risks and benefits, click here.

Investment-based passive income ideas in Singapore

The following are common income-generating instrument vehicles, and we help you weigh whether they are suitable for your investment style and goals.

Dividend-paying stocks

Characteristics: 

• Dividend-paying stocks are typically more mature businesses, as opposed to those companies in their growth stage with higher price return potential. 
• Dividend-paying stocks provide investors with more liquidity, compared to other income-generating assets with lock-ups.
• Some listed companies have formal dividend policies in place, which outline their commitment to regular dividend payments. Companies with a long history of consistently paying dividends can provide a level of predictability. 

Pros: Singaporean-listed companies are typically exempted from tax, another cost-saving measure that can help boost a passive income strategy. 

Cons: As dividend payouts are not guaranteed, investing only in high-dividend companies can run the risk of companies cutting their dividends. 

REITs (Real Estate Investment Trusts)

Characteristics:

• REITs provide regular income through dividend distributions and potential capital appreciation, and in Singapore, are required to pay 90% of their taxable income to investors.
• REITs can be sensitive to changes in interest rates. When interest rates rise, the cost of borrowing for real estate companies may increase, potentially impacting their profitability and the value of the REIT. Conversely, declining interest rates can be favourable for REITs.
• Like any publicly traded security, REITs can be subject to market volatility. The share prices of REITs can fluctuate based on market conditions, interest rates, and investor sentiment. 

Pros: REITs offer diversified exposure to the real estate sector without the high capital requirements of direct property ownership. 

Cons: REIT investors have limited control over the specific properties held within the REIT. 

Wondering whether REITs or stocks will better suit your needs? Read about their differences here.

Bonds and bond funds

Characteristics: Fixed-income investments like bonds and bond funds can provide stable, predictable income. Government and corporate bonds offer varying levels of risk and return. 

Pros:

• Bond funds hold a number of bonds and are usually professionally managed. 
• Investors have control and transparency over the specific bonds they hold. If held until maturity, and assuming no default, bond debtors return to investors the principal.

Cons: 

• Individual bonds are not a strong diversifier and would require a significant amount of minimum investment and research time to plan and manage.
• Bond funds come with fund management and other fees that diminish the total distribution.

Read more: The comprehensive guide to bonds in Singapore

Money market funds

Characteristics: Money market funds invest in short-term, low-risk securities such as treasury bills, certificates of deposit, and commercial paper, and are managed by portfolio managers.

Pros: 

• Money market funds offer high liquidity with relatively low risk, allowing investors to easily access their funds by making withdrawals.
• Money market funds invest in a variety of short-term securities, spreading the risk across multiple issuers.

Cons:

• Unlike traditional bank savings accounts, money market funds are not insured by the Singapore Deposit Insurance Corporation (SDIC). There is a potential risk of losing principal, although it is relatively low. Yields are not guaranteed, as well.
• Money market funds may charge management fees and other expenses, which can reduce the overall yield.

High-yield savings accounts and fixed deposits

Characteristics: High-yield savings accounts and fixed deposits offer relatively low-risk options for earning passive income. 

Pros: 

• Top high-yield savings accounts also come with lower fees, increasing your returns over time.
• Fixed deposits provide guaranteed returns over a set period, which may suit passive income investors with a “set and forget” mindset.

Cons: 

• Higher-yield savings accounts may require minimum deposits and have stipulations on withdrawals.
• Fixed deposits often come with limitations, such as minimum balance requirements or restrictions on withdrawals. 

Curious about the best fixed deposit rates in Singapore? Find out more.

Passive income-generating investment portfolios

As with any investment decision, you should always plan, create goals and do your due diligence to understand what you are investing in.

While these passive income ideas can provide stable returns, some of them may not keep pace with inflation over the long term. Historically, globally diversified equity markets have consistently outperformed fixed deposits, albeit with higher volatility. 

Therefore, it's crucial to consider your financial goals, risk tolerance, and investment horizon when deciding on the most suitable passive income strategy for your portfolio. 

Passive income solutions on Endowus

The Endowus Income Portfolios offer various options tailored to different life stages, with payout targets ranging from 3.5 - 4.0% to 5.5 - 6.0% per annum. 

These portfolios employ a multi-manager, multi-fund approach, providing you with diversified sources of income while balancing growth objectives. By reinvesting these payouts, you can potentially accelerate your wealth accumulation over time.

Earning passive income is certainly not a pipe dream and there are certainly many different ways possible to achieve this. With our Endowus Fund Smart, investing for passive income is made easy, and in just a few clicks, DIY investors can design a solution for specific income needs. 

We do all the work behind the scenes, so you can invest better to live better. To get started with Endowus, click here.