8 times investments are like the Zodiac

Like the signs of the Zodiac, passive income instruments have different characteristics. Pick wisely and you can build a long-term portfolio of quality assets that will survive and thrive through market cycles.

Here are 8 investments that let you enjoy returns through passive income:

Like the Tiger, companies are always on the hunt for profit. You can join the hunt in two ways with cash equities: enjoy regular income dividends and potential gains in share prices, and dividends. As an investor for passive income, the dividends matter most to you.

What to look out for

• The level of dividend: Consider if the company will be able to pay the level of dividends you want. Observe these:
  • Balance sheet: how much stronger are the company’s assets compared to its liabilities.
  • Earnings: can the company continue to grow its earnings at the current pace.
  • Investment needs: how much of its cash does the company plough back into the business.
• Mature vs growth companies: As a rule of thumb, mature companies pay better dividends than growth companies. Mature companies tend to pay their cash earnings out as dividends. In contrast, growth companies tend to reinvest in the business, which can leave little for dividends.

If cash equities aren’t delivering the dividends you want, gallop ahead with preference shares. A unique hybrid of ordinary stocks and bonds, preferences shares have a few attractive traits:

• Priority access to dividend payouts. The company must pay you before they pay other ordinary shareholders. This stays true even if the company is being liquidated.
• Steadier flow of dividends compared to ordinary shares. Like bonds, you can expect a fixed dividend yield too. But unlike bonds, the company is not legally obligated to pay you the dividend.
• They’re not accompanied by voting rights. So you will always enjoy the passive income of dividend payouts.

Saddle up with dividends from preference shares if you’ve a lower appetite for risk, and yet want to invest in equities.

What to look out for

As they share characteristics with bonds, preference shares are typically less volatile than ordinary shares and could offer a steadier stream of dividends. In fact, preference shares with a guaranteed dividend are usually considered to be like bonds.

Like the patient and dependable ox, bonds provide you with a steady, reliable stream of interest payments. When it matures, then you can also get back your initial investment.

Their stubborn, yet conservative nature usually sees them plough on with coupon payments. In fact, this continues even when market conditions are tough. If it doesn’t, the issuer will have to declare a default. So unless that happens, payments will continue till the bond matures.

What to look out for

When buying, look out for the minimum trade sizes, which affect the upfront capital needed. Also consider the issuers’ credit rating, which predicts their ability to repay you, since buying a bond means you are essentially giving a loan to the government or a corporate borrower. For a crash course, check out the bond-buyer's essential checklist.

Like the peaceful rabbit, Singapore Savings Bond (SSB) are good for bringing some stability to your investment life. They’re a special type of bonds that are issued and fully-backed by the Singapore government, which has the highest credit rating score of AAA.

The interest paid by a SSB grows steadily over time – the rate is calculated from the average 1-year, 2-year, 5-year and 10-year Singapore Government Securities (SGS) yields. SSBs pay you interest every 6 months and you can invest a maximum of S$200,000 for up to 10 years.

Perk up your ears for this: SSBs can be redeemed at any time for your investment amount back in full, with no capital losses or penalties.

What to look out for

If you redeem your SSBs when an interest payment is due, you’ll receive the payment along with your initial investment. But if you redeem before the payment is made, you’ll receive a pro-rated interest amount instead.

The hound is a diligent sentinel, loyal and reliable. Similarly, funds (also known as unit trusts) are watched over by skilled professionals – fund managers. They’re devoted to maximising the performance of the funds under their care while keeping risks under control.

By pooling investors’ money to buy into stocks or bonds, funds offer diversification for relatively small amounts.

What to look out for

For passive income, look for the funds that fetch you dividend-yielding stocks or bonds. These are usually paid either monthly or quarterly.

Learn about the 5 reasons why units trusts are like buffets, and understand how to read a fund factsheet like a movie poster.

Exchange Traded Funds (ETFs) aim to match the performance of an index move-for-move, instead of trying to beat the market like funds do. This makes their costs generally lower than that of funds. You can read on how the other differences between ETFs vs Funds and how they are driven differently.

What to look out for

Not all ETFs pay dividends. So make sure that the one you’re eyeing distributes dividends either annually or every 6 months.

For regular income worth crowing about, rent out your properties. It’s a practical way of earning money from what you already have without selling them. You can also eventually pass your property as an asset on to your loved ones as part of your legacy.

What to look out for

Before crowing about your new rental listing, be sure to also set aside a rainy-day fund. Physical properties are are not easily liquidated as it takes time to sell it at your ideal price. Selling properties at short notice might outcome in a fire-sale which is not ideal.

To get the most out of your rental, list your property on your own, and deal with tenants directly.

Real Estate Investment Trusts (REITs) are filled with appetising properties that their managers have carefully sniffed out.

Traded on the stock market, REITs appeals to investors seeking a stable income flow. They distribute at least 90% of their income each year to investors. This is one reason for the 6% - 7% dividend yield observed from REITs listed on the SGX.

What to look out for

The country, sector and location of properties in the REIT portfolio determines its individual characteristics:

• Country where the property is located. REITs with a Singapore focus will have very different characteristics from those that invest in properties throughout Asia.
• Sector that the REIT manager is focusing on. Selecting a variety of sectors, such as commercial, industrial, retail, healthcare, hospitality, and logistics, will provide diversification.
• Actual properties the manager has invested in. Each REIT has many properties, i.e. many addresses.

Find out how you can invest in REITs easily.

Prosperity takes planning

In a market that’s always changing, it’s only wise to plan ahead. Whatever awaits, finding a match for your needs and risk profile can provide a regular income stream, year after year. When in doubt or if you need help, speak to a Investment Consultant or your Relationship Manager. Take some time to familiarise yourself with these assets and don’t procastinate in building up your wealth management portfolio.

Disclaimers and Important Notices