My 3 best forms of passive income for 2023

Passive income is my favorite income. With a paid job, I spend my time and effort making a living. But my unearned income plays on without active involvement (and works for me night and day).

I don’t like cash or bonds

As a veteran investor, I like to take risks with my money to generate higher long-term returns. That’s why I tend to keep only modest amounts of cash on deposit. As a result, the passive income I receive from savings interest is small.

Also, I have long distrusted government and corporate bonds, as these IOUs typically offer ultra-low coupons (ordinary interest) to bondholders. But bond prices fell in 2022, lifting bond yields to post-global-financial-crash highs. Even so, my family portfolio has not bought bonds for income.

Two forms of passive income

The highest type of unearned income is from high-yielding collective funds. Managers of these pooled investments buy shares of companies that pay generous cash dividends. By assembling a portfolio of high-yielding stocks, the fund delivers higher returns than the broader market.

That said, ongoing expenses and fund expenses will drive investors’ returns. Now, I’m looking for a low-cost fund that gives me a decent cash return. However, I would definitely avoid funds with yields above, say, 7% per year. That’s because these funds are often dipped into investors’ capital to pay higher dividends.

A second form of passive income is only for older investors: retirement. I will be 55 soon enough, at the point I can tap into the company and personal pension I have built since starting work in 1987. Most of these pots are modest in size, but I have two guaranteed, pension work final-salary. .

Therefore, I studied the options for this pension pot. Should I start taking early retirement at 55, or wait until I’m 60 or 65? Do I take 25% as a tax-free amount of cash to spend or invest elsewhere? The decision is complex and technical, so I will take my time before deciding.

Favorite unearned income

Our favorite form of passive income is dividend income from stocks. Although this is perhaps the riskiest form of income, it can also be one of the most lucrative. But the bad news is that stock dividends are not guaranteed, so they can be cut or canceled at any time.

Also, most London-listed companies don’t pay dividends, so the world of cash-generating UK stocks is pretty small. And that’s why I generally look for quality dividends among blue-chip members FTSE 100 index (also some FTSE 250 mid-cap stocks).

Indeed, starting in mid-2022, my wife and I have created a new income-based portfolio of 10 UK dividend stocks. The average return on these high-yielding stocks is about 1.75 times that of the FTSE 100 itself (which returns 3.7% per annum). Be your own high yielding family fund.

Finally, by investing in quality companies that pay good dividends, I should also benefit from capital gains from rising prices. And that’s why dividend investing is the #1 win-win strategy for passive income!