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Thanks to a sea change in investment markets in 2022, I’m excited about the potential for passive income in 2023. That’s because rising interest rates have altered the asset landscape, bringing exciting opportunities for investors. .
What’s so 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, income from stock dividends, income from rental property, and interest from corporate and government bonds.
I’m a big fan of passive income, as is my hero, the American billionaire and philanthropist. Warren Buffett. He Warns, “If you don’t find a way to make money while you sleep, you will work until you die.” And that’s why unearned income is at the center of my long-term investment strategy.
Yields soar for cash and bonds
The big problem for investors looking for income is that global interest rates bottomed out after the global financial crisis of 2007-09 and stayed there. But last year, central banks, including the US Federal Reserve and the Bank of England, embarked on a round of rate hikes.
Therefore, interest rates (and savings rates) have skyrocketed around the world. For example, the UK base rate shot up from 0.1% per year at the end of 2021 to 3.5% today. Also, the fed funds rate has jumped from a range of 0-0.25% to 4.25-4.50% today.
Another silver lining for fans of passive income is that rising interest rates have pushed up bond yields. For example, an ultra-safe 10-year British gilt now offers a yield of 3.3% per year, up from almost zero at its 2020 lows. Similarly, a 10-year US Treasury bond pays a 3.4% annually, more than 10 times its 2020 low of 0.32%.
This means that cash deposits and bonds can now pay significantly higher interest. That’s good news for savers. Unfortunately, skyrocketing inflation is eating away at the future value of these savings, which is unpleasant.
Stock dividends skyrocket
Another plus is that stock dividends (regular amounts of cash companies pay out to shareholders) are high. One estimate is that dividends from UK stocks could reach a record high of £83.8bn in 2023, up from £79.1bn in 2022. So my wife and I have been buying several dividend dynamos in the FTSE 100 Y FTSE 250 to take our share of this cascade of cash.
Pensions are also about to increase
The over-55s own perhaps four-fifths (80%) of all UK financial assets. I’m ready to join this pool in the spring (yikes!), but I’ve decided not to withdraw my old pensions yet. However, my wife was laid off and granted early retirement in the spring of 2021, and her company pension will be paid starting in mid-2023.
Since your old-school final salary pension is linked to an index, your pension increase could be more than 10% this year. But we don’t have any plans to spend this new stream of passive income. Instead, we’ll use a portion to offset our ever-increasing bills, and the rest will be invested to generate more revenue in the future.
In short, lower asset prices and higher interest rates have raised returns on cash, bonds, and stocks. In addition, state pensions and many companies will increase considerably. All this is promising for lovers of passive income!
