Ah, passive income… the Holy Gail of investors everywhere. Who wouldn't want to secure an income stream that arrives in your bank account, regardless of your manual labour output?
You get paid while you're at the beach, climbing a mountain, or watching a movie. You get paid whether you're young or old, sick or healthy, blond or brunette.
Of course, passive income isn't easy to achieve. There's a reason why most of us, this writer presently included, have to actively work for our incomes for most of our lives.
But passive income is possible. And I like to explore all options when it comes to this veritable unicorn.
So let's talk about three forms of passive income that you can pursue today.
My three favourite streams of passive income
Interest
Interest is technically income you earn from loaning out your money to others. Its most common form is the interest you will receive from your bank accounts, in exchange for trusting your bank with your hard-earned capital.
It's an easy source of passive income to overlook, but interest is passive income all the same. The only proviso for receiving interest in a bank account is the cash you deposit. For most of the past decade, falling interest rates rendered cash investments fairly impotent when it came to passive income.
But with the Reserve Bank of Australia (RBA) jacking up interest rates by an unprecedented nine times in the past year (most recently yesterday), it is roaring back with a vengeance.
Today, it is possible to net an interest rate of more than 4% in a high-interest savings account or term deposit. So if you want some passive income, your bank account is a great place to start.
Rent
This is one most of us would be familiar with. If you own land and receive income from it, this is passive rental income.
Whether your property is residential in nature, or otherwise industrial or commercial, there are several pathways to receiving rental income.
But don't worry, you don't need to save up six figures for a house to receive a rental income. The ASX is home to more than a few real estate investment trusts (REITs) that require as little as $500 to invest in.
If you own units of a REIT, the income you receive from them is technically rental income, since it derives from the rent that owners of the REIT are all entitled to receive.
Passive income from dividends
Last but certainly not least, we come to my personal favourite form of passive income: dividends. Dividends are cash payments that companies can make to their owners.
In the case of a public company like Telstra Group Ltd (ASX: TLS), Commonwealth Bank of Australia (ASX: CBA), or Woolworths Group Ltd (ASX: WOW), these cash payments are paid to all shareholders in proportion to the shares they own.
Not all ASX shares pay dividends. But many do, and have for decades. The best companies increase their dividends over time, meaning that investors are always enjoying strong income that keeps up with inflation.
Additionally, dividends often come with franking credits on the ASX too. Franking credits are essentially a tax receipt that allows the investor to claim a tax deduction, or even a cash refund.
Dividends and franking credits can provide passive income that far exceeds what you can get from a typical rental property or savings account. But finding a top-notch dividend payer can be tricky, and requires some basic financial knowledge.
As such, investors might want to outsource this by choosing an income-focused managed fund or exchange-traded fund (ETF) instead.
