Making our money work for us is key to help our wealth grow to its full potential over the long-term. Passive income can play an important part in that.
There are a wide variety of assets that we can own to generate passive income, such as shares, property, and term deposits.
However, with the costs involved in holding residential property, I don't think residential rental income in a city will unlock strong (or even positive) cash flow.
But, there are a few other passive income streams that can be very appealing.
Image source: Getty Images
Dividends
For me, the best passive income Aussies can buy is fully franked dividend income.
Any company can pay a dividend, whether it is Australian, American, Canadian, British, European, or other. A dividend is when the business shares some of its profit with shareholders.
Companies try to earn a profit every year, and they don't necessarily need to hold onto/invest all of that profit to grow earnings in the following year. Depending on the valuation and the dividend payout ratio, some businesses can offer very pleasing dividend yields.
Australian residents have a particular advantage over foreigners when it comes to owning Australian companies. Franking credits are refundable credits generated when Australian companies pay income tax. Those franking credits attached to dividend payments boost the company's after-tax dividend yield.
Some of the businesses I like for full franking are Telstra Group Ltd (ASX: TLS), Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), and MFF Capital Investments Ltd (ASX: MFF). Part of the reason why I like these businesses is that they are regularly increasing their payouts.
Distributions
Dividends are not the only passive income that ASX shares are sending to investors.
Businesses that operate in a trust structure – which is different to a company – send out distributions to investors.
Real estate investment trusts (REITs) and exchange-traded funds (ETFs) both operate in trust structures, and they pay distributions.
I like REITs because commercial property usually offers a much higher yield than residential property, and it can still provide a pleasing mixture of income stability and growth. Some of the REITs I like include Rural Funds Group (ASX: RFF), Centuria Industrial REIT (ASX: CIP), and Charter Hall Long REIT (ASX: CLW), which all have solid starting yields.
Term deposits for passive income
Term deposits can be an appropriate place to park money if Aussies don't want to take on any risk with that money. Despite a couple of RBA cash rate cuts this year, we can still get a decent interest rate. I think it's better to earn interest from a term deposit than the cash sitting in a low/no interest account, if that money isn't needed in the immediate future.
For investors who don't want to hunt down which term deposit is the best, they could utilise the ASX ETF Betashares Australian High Interest Cash ETF (ASX: AAA). Its money is spread across several financial institutions in Australia, including (currently) Bank of Queensland Ltd (ASX: BOQ), National Australia Bank Ltd (ASX: NAB), and Bendigo and Adelaide Bank Ltd (ASX: BEN).
The current cash yield, net of fees, is 3.93%.
But, I prefer ASX dividend shares because of their ability to pay a higher yield and deliver growth, which is what I'm regularly on the lookout for.
