Here’s why I’m pumped for passive income in 2023

Thanks to the sea change in the investment market in 2022, I am worried about the potential for passive income in 2023. This is because the rise in interest rates has changed the asset landscape, providing exciting opportunities for investors.

What is good about passive income?

Passive income is not earned, so it does not come from work. Popular examples of unearned income include interest paid on cash deposits, dividend income from stocks, rental income from property, and interest from corporate and government bonds.

I’m a fan of passive income – just like my hero, an American billionaire and philanthropist Warren Buffett. He warned, “If you don’t find a way to make money while you sleep, you’ll work yourself to death”. And that’s why unearned income is in long-term investment strategies.

Yields soar for cash and bonds

The big problem for income-seeking investors is that global interest rates hit rock bottom after the 2007-09 global financial crisis and remain there. But last year, central banks including the US Federal Reserve and the Bank of England began a round of rate hikes.

Therefore, interest rates (and savings rates) are rising around the world. For example, the UK base rate rises from 0.1% a year at the end of 2021 to 3.5% now. Additionally, the Fed Funds Rate has jumped from a range of 0%-0.25% to 4.25%-4.50% today.

Another positive for passive income fans is that rising interest rates have lifted bond yields. For example, the ultra-safe 10-year UK gilt is currently yielding 3.3% a year, compared to zero at the 2020 low. In addition, the 10-year US Treasury bond pays 3.4% a year – more than 10 times 2020’s less than 0.32%.

This means that cash deposits and bonds can now pay more interest. This is good news for savers. Unfortunately, high inflation erodes the future value of your savings, which is bad.

Stock dividends increase

Another bonus is that stock dividends — the regular amount of cash paid out by a company to shareholders — are skyrocketing. One forecast is that UK stock dividends could reach a record peak of £83.8bn in 2023, compared to £79.1bn in 2022. Therefore, my wife and I have bought various dividend dynamo in FTSE 100 and FTSE 250 to take our share of this cash cascade.

Pensions are also set to increase

Over-55s probably own four-fifths (80%) of all UK financial assets. I was set to enter this group in the spring (yikes!), but have decided not to pull down the pension earlier. However, my husband was made redundant and given early retirement in the spring of 2021, with a company pension due to be paid from mid-2023.

With old school final salary pensions linked to the index, pension increases could be 10%+ this year. But we have no plans to spend on this new passive income stream. However, we will use some to offset our rising bills, and the rest to invest to generate future income.

In summary, lower asset prices and higher interest rates have driven yields from cash, bonds, and stocks. In addition, state and many company pensions will increase rapidly. This is all promising for passive income lovers!