Where to invest for passive income
Before thinking about where to invest money for passive income, let’s figure out what it is. Passive income is cash receipts that do not depend on age, health status, working capacity and other personal factors. This is a financial "airbag" that supports its owner at any time.
First of all, a typical set of users is a state employee, works in a company or is engaged in entrepreneurship. For example, if he loses his job or business, his active earnings will be lost. An investor, having invested once, receives monthly payments throughout his life – this is how long-term investing works.
We offer an overview of reliable ways to form an "airbag" with cash payments and minimal risks.
Where to invest money for passive income: TOP 10 options
Creating passive income begins with planning – it is formed, as a rule, not in a month or even in a year. First, decide when additional income is needed – in 5, 10 years or more. Secondly, determine how much should be earned by this time, what will be the regular payments. In the end, it remains to consider how much you can postpone. For example, 1000 🪙 from salary or 1 million immediately after the sale of the apartment.
Having decided on the plans, you can decide where to invest money for passive income. Investment options may include:
1 bank deposits;
2 individual investment account (IIA);
3 portfolio of dividend stocks;
4 bond ladder;
6 real estate and real estate funds;
7 investment with trust management;
8 business and direct investment;
9 investment in Internet projects;
10 intellectual property.
First of all, before choosing an investment area, study the main features. For example, get a clear picture of the risks and potential returns.
Bank deposits and accounts
Let’s first understand what a bank account is. Bank deposits and savings accounts are classic investment options with minimal risk. Suitable for those who are not ready to invest in securities and other financial instruments.
It is especially relevant that in 2022 the average return on deposits is expected to increase to 7.5-8% per annum. This is due to the growth of the key rate of the Central Bank of the Russian Federation. Therefore, the maximum return can exceed 10%. Such income, most likely, will be available on deposits within the framework of special bank promotions.
Savings accounts allow you to withdraw money at any time. As a result, the rates on them in 2022 will not exceed 6-7% per annum. Profit on the deposit can be received at the end of the term or monthly in the form of interest.
For example, to live on interest income, you have to deposit a large amount. For example, to receive 30 thousand 🪙 monthly, you need to invest 5 million 🪙 at a rate of 8% per annum for 5 years.
First of all, it is worth choosing banks participating in the state insurance system to store money. If a credit institution goes bankrupt or loses its license, insurance will cover up to 1.4 million 🪙. Amounts of several million are better distributed among different banks. State insurance also applies to foreign currency deposits, but in terms of rubles at the exchange rate of the Central Bank.
Individual investment account
IIS is a special ruble account for investments with tax deductions and benefits. It is opened on the exchange website or through the current broker. The validity period of the account is 3 years. After the expiration of the term, you can open a new account and transfer assets to it.
First of all, the objects of investment in IIS are domestic and foreign assets traded on the Moscow and St. Petersburg stock exchanges. For example, stocks, bonds, futures, ETFs. It is not necessary to buy securities. In addition, the account holder can simply put money on it and apply for benefits.
There are 2 types of tax preferences on IIS:
• type A – deduction for the return of personal income tax paid to the state by an individual;
• type B – exemption from income tax on income from investment operations.
The maximum amount of tax refund per year for type A is 52 thousand. Of course, the account holder must file a declaration and be a personal income tax payer.
Firstly, type B benefits become available after 3 years of IS operation. Therefore, in order to activate it, the investor confirms that he did not apply deduction A and submits an application. As a result, all profits from IIS operations are exempt from income tax. At the same time, there are no restrictions on the amount of profit and the number of transactions.
Thus, IIA with deductions gives a yield of 14% to 20% per annum. Keep in mind that the best time to open is December. If you create and replenish an account in December 2021, submit a declaration at the beginning of 2022, then in May a refund of up to 56 thousand will come🪙
Portfolio of dividend stocks
A portfolio of dividend stocks can become a source of permanent income of 15-20% per annum. First of all, it includes securities of companies with high dividends. A dividend is a part of the net profit of a joint-stock company. Accordingly, it is distributed among the holders of securities. The procedure for such payments is governed by the dividend policy of the issuing company.
Let’s look at an example of how a portfolio is formed. The investor invested 100 thousand 🪙 in the shares of Sberbank, Magnit, Norilsk Nickel, Severstal, PhosAgro. As a result, everything is in the same proportions. The total dividend yield was 15%. Consequently, after a few months, the owner changed the structure of the portfolio. As a result, PhosAgro and Magnit were sold against the backdrop of lower yields. They were replaced by Gazprom and M.Video. In conclusion, the portfolio profitability increased to 17%.
An investor who wants to build his portfolio is always thinking about how to choose issuers and stocks. And most importantly, where to invest money? The best option is “dividend aristocrats". These are reliable companies that have consistently paid dividends for 25 years.
In the US, dividend aristocrats include large stable companies from the S&P 500 index. For example, Coca-Cola, Pepsi, McDonalds, IBM, Exxon Mobil, Procter & Gamble, etc. The shares of these giants are growing slowly, as their business has already captured a large share of the market. Aristocrats’ dividend yields range from 2% to 10% in US dollars.
Investments in such a portfolio start from $50-100. The current stock market is relatively young, so there are no dividend aristocrats. On the other hand, there are issuers close to "aristocrats". For example, LUKOIL, Tatneft, Novatek, NLMK. In addition, Sberbank, Norilsk Nickel, MTS, Etalon have prospects for dividend policy.
Bonds are fixed income bonds. Debt securities are issued by governments, municipalities and companies. The issuer buys the bonds back at a fixed price with interest at a specified date.
OFZ is a universal investment option, suitable for both large investors and those who do not know where to invest small money. One federal loan bond costs 1000🪙 The minimum entry threshold for OFZ is 10000🪙 The validity of the paper varies from 1 to 10 years.
The holder receives for each OFZ:
- coupon income every 6 months;
- repayment of the debt with interest of 5-8% when the receipt expires.
Thus, even for 10 thousand, you can form a small investment portfolio. First of all, with an increase in the key rate of the Central Bank of the Russian Federation, OFZ yields will grow.
To ensure a stable cash flow, a strategy such as the “bond ladder” is used. The most important thing to understand is that this is a portfolio of securities with incremental repayments.
For example, a contributor has created a package of 5-year OFZ-PD. The maturity of the securities in the portfolio comes in turn: in 2022, 2023, 2024, 2025 and 2026. The money received from OFZ redemption in 2022 is invested in a new government bond with a term until 2027, and so on.
The bond portfolio should be supplemented with corporate papers. The average yield on the bonds of many companies varies from 7 to 12%. Experts advise buying bonds of Russian Railways, Rosneft, Novotrans and other large corporations.
If you have investments from $1000-10000, you can invest in Eurobonds of many corporations and American bonds. Eurobonds are issued by subsidiaries of many issuers. Hence, they offer a high coupon yield of 4% in dollars.
Investment Funds ETFs
An Exchange Traded Fund is an overseas investment or index fund. Its shares or shares are traded on stock exchanges. Such a fund pools depositors’ money and invests in a portfolio of securities. Therefore, it may include securities of issuers from the same area of the economy or from different industries.
An ETF is a profitable alternative to buying stocks or bonds. Since such funds usually include assets that not everyone can afford. For example, the price of one Amazon share is more than $3,000. However, you can buy a stake in an ETF that has Amazon shares in your portfolio for $1. On average, shares of foreign investment funds cost 1000-2000 🪙 By purchasing a share of such a fund, the investor invests in all assets of the ETF portfolio.
Shares of various ETFs from providers FinEx and ITI Funds are traded on the Moscow Exchange. For example, FXUS combines the shares of 500 US corporations in the field of IT, energy, industry, real estate and other industries.
Exchange-traded funds pay their holders income from securities:
- dividends from shares – annual, semi-annual, quarterly;
- coupons from bonds – once a year, once every 6 or 3 months.
Many U.S. ETFs are required by law to pay out at least 90% of the return on securities to their depositors. European funds usually reinvest dividends and coupons in the purchase of new securities. Most ETFs traded on multiple exchanges also reinvest profits. Such Russian ETFs as RUSE, FXRD and some others pay dividends.
Another advantage of ETFs is the ability to buy and sell shares at any time. For example, if you invest in several different funds, you can earn on the growth of their value. It is enough to periodically sell part of the shares of the ETF that has risen in price.
Real estate and funds
Real estate is a way to earn extra money, not an investment. An apartment or room by itself will not generate profit. You will have to take an active part: look for tenants, make cosmetic or major repairs, fix broken furniture and appliances. As a result, the costs of housing and communal services, repairs, and the purchase of furniture may outweigh the profits received.
As an option, you can consider transferring the object to trust management. In this case, all work on real estate maintenance will fall on the shoulders of the employees of the management company or agency. The payment for such services will be a percentage of rental income.
In real estate, there are interesting sources of dividend income:
- Russian ZPIFs – closed-end real estate investment funds;
- US REITs are real estate funds traded on US stock exchanges.
Russian closed-end mutual funds are construction, land, rental, development, mixed. To become a shareholder of the fund, it is enough to invest from 500 thousand to 1 million 🪙. The return of investments is made after the dissolution of the fund. The life of a closed-end investment fund, as a rule, is 5-15 years. Units of such a fund are very difficult to sell, as they are not traded on stock exchanges.
REITs are made up of shares in specialized real estate corporations. The companies included in such funds own shopping malls, hotels, offices and hundreds of other properties. They are involved in the construction, leasing, buying and selling of real estate.
You can invest in REIT through a US or current broker. Foreign brokers provide a wider choice. The entry threshold starts from $10, the dividend yield varies from 2% to 10%. US laws oblige REITs to direct 90% of profits to dividends.
Trust management (DM) is a service for the formation and management of a portfolio of securities. The management company (fund or broker) appoints a professional manager. He makes all decisions regarding transactions on the account.
The entry threshold for the implementation of a typical DM strategy is 2-5 million 🪙 Investments for creating an individual strategy start from 10 million 🪙 With an individual approach, the manager will take into account any wishes of the client, for example, on the payment of monthly income.
The main advantages of trust management:
- opportunity to earn without experience;
- saving time – no need to study financial instruments, analyze the market;
- lack of stress. Doing transactions on your own is always risky and stressful.
The main disadvantage of remote control is high commissions for services. The standard annual account maintenance fee is 1-2% of the value of the assets in the portfolio. Often, management companies charge up to 20% of profits. There are commissions for opening an account, crediting, withdrawing funds and other services. Therefore, before signing a remote control agreement, it is important to calculate the expected return minus all commissions.
The profitability of financial instruments and strategies is limited. If the investment scheme at its peak brings 20% per annum, then growth up to 30% should not be expected. Another significant disadvantage is the large number of scammers or non-professionals in this area. Therefore, before concluding an agreement, it is worth consulting with an experienced financial advisor in advance.
Business and direct investment
According to the analytical agency Preqin, direct investment outperforms the stock market in terms of profitability by 1.5-2 times. Therefore, for those who are thinking about where to invest money, a business can also be one of the options.
Direct investment is the investment of money in business projects, production processes or tangible assets. For example, assets include machine tools, workshop space, semi-finished products, and so on. Direct investment allows you to receive part of the profit, participate in the management of the enterprise, and sometimes influence the development of the entire industry.
An individual or legal entity participating in direct investment becomes a shareholder in the authorized capital of the organization. The shareholder’s level of influence on business processes directly depends on the purchased share in the enterprise. With large investments, he gets the right to be present on the board of directors.
Direct investment has the following disadvantages:
- high entry threshold – 10-100 million or more, depending on the size of the organization;
- long payback period – 5-10 years or more;
- low liquidity of investments;
- the complexity of transactions for the transfer of shares in the business.
Direct investment is a promising direction, because in 5-10 years a business project can pay off many times over. But for most individuals, this area remains inaccessible due to the high entry threshold.
Investment in Internet projects
The popularity of various Internet services is steadily growing. In addition, more and more investors are investing in ready-made projects. As a result, startups in this area often appear.
Let’s take a look at a few popular trends. Firstly, it is the resale or leasing of a site for the provision of services. Yield varies from 20 to 40% yield. To implement the scheme, the master buys a one-page landing site for a construction or any other company. Then he hires a specialist in optimization and traffic attraction. After reaching the desired level of traffic, the site is rented or sold.
The purchase of an information resource with further promotion in search engines can bring up to 200 thousand monthly. 🪙 The minimum income of an information site is 5-10 thousand. In addition, many invest in several resources with a small monthly income of up to 30 thousand.🪙
Secondly, buying a promoted blog on social networks can be a good investment. Most importantly, they usually sell ads. Summing up, extra traffic can be resold or directed to the desired site.
A real source of passive income on the Internet are affiliate programs. For example, affiliate programs from Amazon or AliExpress. These corporations are willing to pay site owners to attract client traffic. Investments in Internet projects have a number of advantages over classical types of investment.
First, it is a high yield. For example, buying and promoting a ready-made online service can generate 20-40% income. Profitability of successful startups starts from 100% per annum.
Secondly, an acceptable entry threshold. A start is possible with small investments, for example, 10 thousand 🪙 But with an investment of about 100 thousand 🪙, project promotion can be more effective.
Thirdly, quick payback. The first profit appears after a few weeks or months.
In addition, there are no geographic restrictions.
The main disadvantage of investing in Internet projects is the need for special knowledge. It is important to be able to choose promising areas and evaluate the quality of resources. Without knowledge and experience, the risks of losing invested funds will increase many times over.
Creation of intellectual property
Intellectual property (IP) is an asset that creates value or generates income. For example, an IP can be information, an idea, a physical object, or a new development. Thus, fixing copyright on IP allows you to receive remuneration – royalties for the rest of your life. It is credited to the author’s account when downloading or obtaining IP in other ways.
Here are some options for intellectual property that bring regular income. First, they are patented inventions. Secondly, these are applications and video games. In addition, you can invest in computer graphics, 3D models, NFTs. Thirdly, you can earn on photos and videos on stocks. First of all, there is a demand for information products. For example, books, training courses, manuals, reference books.
Therefore, financial investments may be required at the stage of development, launch and promotion of the project. If you choose a hot topic, then IP will generate income for many more years. In addition, it is important to remember that investing in intellectual property is unreliable and risky. Unfortunately, there is no guarantee that IP will be in demand.
You can create an independent source of regular income or a financial "airbag" in different ways. Some people prefer bank deposits, others prefer securities. For example, someone wants to invest in startups. Each option has its own characteristics and associated risk.
Having studied the information about the main areas of investment, anyone can choose where to invest money in 2022. Therefore, in order to achieve success, you need to follow the rules of risk management.
It is worth remembering that along with the growth of profitability, the risks of losing invested funds increase. Income divorced from reality is often offered by fraudulent firms. In addition, it is very risky to invest all your money in one scheme or security. It is better to separate funds and invest in different assets.