Three ways to boost passive income
Inflation-weary Australians don’t need to take on a side hustle to increase their income. Your portfolio can do the heavy lifting when it comes to generating passive income.
Record numbers of Australians – almost one million people – are working multiple jobs to make ends meet.
It’s not surprising. Wages are growing at a glacial speed, up 3.2% in 2024, barely ahead of inflation at 2.4%.
The thing is, earning more doesn’t have to mean working more. Here are three ways to boost your passive income.
About Paul Clitheroe
Paul Clitheroe is Chairman of InvestSMART. He has been a media commentator for more than 30 years and is regarded as one of Australia's leading experts in the field of personal investment strategies and advice. Paul hosted the Channel 9 program Money, helped establish Money magazine, where he now acts as editorial adviser, and is the author of several personal finance books.
Paul is also chairman of Ecstra and the Ensemble Theatre Foundation. He is also the chair of Financial Literacy and Professor with the School of Business and Economics at Macquarie University.
Despite February’s rate cut, it’s still possible to earn a decent return on cash savings – up to 5.45% with Rabobank or 5.40% with ING. You may need to be prepared to meet various conditions to earn bonus interest.
Term deposits are also offering high returns. According to Canstar, terms of three to 12 months are paying the top rates, with an average rate of 4.24% on six-month terms. If you’re looking for regular income and want to receive interest monthly instead of when the deposit matures, expect the rate to drop slightly, often by around 0.2%.
The catch with cash is that you won’t get the benefit of capital growth, especially if you’re withdrawing, rather than reinvesting, interest payments.
Over time, this will see inflation eat away at the purchasing power of your money – and the interest it generates.
If you’re comfortable taking on more risk, quality shares can pay high (and regular) dividends. As these shares should also rise in value, your money should outpace inflation over the long term.
Across Australia’s top 200 listed companies, dividend yields average 3.68%. But you can do better. Among the 50 top dividend payers (think the banks and the likes of Telstra and Wesfarmers) dividend yields are about 5.77%.
That said, there are no guarantees around dividends. BHP stunned investors in February, announcing its lowest half-yearly dividend in over eight years.
One way to keep dividends healthy is to invest in a variety of companies. The downside is that this calls for a fair bit of capital, and ASX surveys confirm that most direct shareholders do not have well-diversified share portfolios.
That’s where exchange-traded funds (ETFs) can be so useful, providing easy access to a broad number of shares in a single, low-fee investment.
As a guide, the iShares Core S&P/ASX 200 ETF (ASX: IOZ) invests in 200 Australian shares. That’s far more than most investors could achieve on their own.
Shares tend to be at the higher end of the risk spectrum, and not everyone is comfortable with this. So, a third option to boost your portfolio’s passive income is to pull together a basket of ETFs covering different asset classes.
It takes your portfolio diversity further, which reduces risk, while letting you tap into a variety of income sources. A portfolio made up of cash, fixed interest, listed property and share-based ETFs, for example, is useful for delivering regular, reliable income while still giving investors access to growth assets that provide capital growth. And the use of ETFs means more of your money goes to work growing returns instead of fees.
The main point is that it’s worth rethinking how you can structure your portfolio to grow passive income as well as long-term wealth. It’s far easier than slugging away at a second job, and by diversifying your investments, you can boost your income without dramatically pumping up risk.
This article first appeared on InvestSMART. You can sign up to get a free newsletter, with fortnightly insights from InvestSMART’s team of experts including Paul Clitheroe and Effie Zahos.
Author Paul Clitheroe
Chairman, InvestSMART
