Investing in ASX shares can be a great way to produce sources of passive income.
In fact, there are several different types of income sources that investors could consider, but let's rule out one right from the start.
For me, residential property is not the greatest place to look for passive income right now. The rental yield is low, considering where the RBA interest rate is now. Plus, the cost of debt is now higher, so it's even more costly to own a negatively geared property.
I'd say there are three other areas of passive income to invest in that currently look more attractive.
1. Savings accounts and term deposits
Most banks now offer much better returns on their savings products, whether we look at Commonwealth Bank of Australia (ASX: CBA), Macquarie Group Ltd (ASX: MQG) or a smaller operator like MyState Limited (ASX: MYS).
Some accounts now offer a rate higher than 5%, so be sure to shop around to find a good bank that can offer a good return. It's useful to be able to receive this level of return in perhaps the safest way. Even bond prices can go up and down.
On the ASX, there is an exchange-traded fund (ETF) that gives investors exposure to Australian cash deposits. Betashares Australian High-Interest Cash ETF (ASX: AAA) does not have any government guarantee, but it's spread across a number of banks. These include National Australia Bank Ltd (ASX: NAB), Bendigo and Adelaide Bank Ltd (ASX: BEN), Bank of Queensland Ltd (ASX: BOQ), Rabobank, Bank of Tokyo-Mitsubishi UFJ, JP Morgan Chase and Citi.
The current interest rate is 4.43% as of 8 November 2023.
2. Commercial property
I think an investment in commercial property can also be a great way to generate passive income because it typically produces a good yield — whether that's in logistics warehouses, farms, healthcare or another category.
But I'd want to look at property with a good chance of rental growth that matches or beats inflation over the long term.
There are plenty of options on the ASX where we can gain distributions from a real estate investment trust (REIT) that owns the property.
Two of my favourites are farmland landlord Rural Funds Group (ASX: RFF) and industrial property business Centuria Industrial REIT (ASX: CIP). Both are seeing ongoing rental growth.
3. ASX dividend shares
And finally, there are plenty of companies on the ASX that pay dividends to investors, which can be an attractive source of passive income.
Australian companies that come with the extra benefit of franking credits can boost after-tax returns.
Some ASX dividend shares may have high yields, while others have lower yields but can deliver long-term growth.
ASX companies that intend to regularly grow the dividend for investors include Bunnings owner Wesfarmers Ltd (ASX: WES), Telstra Group Ltd (ASX: TLS), Sonic Healthcare Ltd (ASX: SHL) and Brickworks Limited (ASX: BKW).
These are among the ASX dividend shares I think could be compelling longer-term picks.
