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Passive income in Australia: What actually works (and what doesn’t)

Byadmin Investing, Superannuation

What’s the first thing that springs to mind when you hear the term ‘passive income’? It may be creating an e-book, a blog or a YouTube channel, engaging in affiliate marketing or selling stock photos, but in fact, none of these is entirely passive. They all require lots of upfront effort to generate a very modest income unless you are very lucky.

However, there is some good news.

A detailed look at what works

There are plenty of guaranteed ways for Australians to set up the dream of ‘income while you sleep’. Here’s a list of what can actually succeed, but with a dose of realism attached.

  • Superannuation

Australian employees are fortunate to have superannuation contributions made by their employer, fixed at 12% of their ordinary time earnings. The self-employed can also make contributions on their own behalf, and employees can make additional personal super contributions. Superannuation enjoys significant tax benefits, which, together with the effect of compounding over decades, put it at the top of the effective passive income list.   

  • Dividends from shares and ETFs

The ASX has a reputation as one of the highest-yielding share dividend markets globally. Add to this the fact that it is one of the few countries with full dividend imputation (franking credits) as part of its tax system, and dividends can rightly take their place as one of the best forms of passive income.

When choosing shares, banks, infrastructure, utility and resources companies often have the highest and most reliable dividends. Alternatively, an investment in ASX ETFs, rather than individual shares, means that you can have a diversified portfolio with a truly passive income, and it’s possible to select ETFs that focus on dividend yield.

However, your expectations need to be realistic. Income can fluctuate, and share values can go down, especially in the short term.

  • A conservative approach to rental property

High immigration-driven population growth in our capital cities, together with a severe shortage of new housing, means that strong demand for rental properties and good rental returns are both likely to be in place for some time to come.

Investment in rental property can work well as passive income if you research professional property managers, seek reliable tenants, avoid temporary rental ‘hot spots’, and don’t rely too heavily on either short-term capital growth or negative gearing (which is not guaranteed to be around forever).    

  • High-interest savings accounts and term deposits

Cash in a bank account can provide a good support for passive income streams, but shouldn’t be its mainstay. While compound interest provides something approaching capital stability, it will usually fail to match inflation once tax is deducted. It works best during high-interest-rate periods, but the returns will often be more modest than the other options already discussed.  

A brief overview of what doesn’t usually work

There are some financial avenues to so-called passive income that are best avoided by the average investor:

  • Student accommodation investment

Strong demand and high rental yields are overshadowed by drawbacks like elevated management fees, tenant turnover, increased wear and tear, lower capital growth and difficulty securing financing.

  • Managed holiday units

This is yet another form of ‘hands off’ property investment with the same apparent benefits but significant downsides.

  • Buying shares only for high yield

Exercise caution when choosing shares with a high dividend. If there’s no history of accompanying capital growth, it could be that neither the dividend nor the value of your investment is sustainable.

  • Active and frequent share trading

Regular share trading to chase short-term bursts of capital growth is best left to the experts. Statistics show that only 4% of day traders make a living from their activities, and approximately 97% of day traders lose money. Take a tip from Warren Buffet, and put time in the market ahead of timing the market.

Build assets first, not income

There’s no fast route to a high level of guaranteed, genuinely passive income. Most financially successful Australians prioritize asset building, from which income emerges over time. Talk to your financial adviser to find out about some slow but sure ways you can add to your income while you sleep. 

The information provided in this article is general in nature only and does not constitute personal financial advice.  

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