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The stock market offers many opportunities for investors like me who are looking for passive income from high-yield investments.
Let’s explore three different ways I can generate additional income with minimal effort in 2023.
1. Dividend Stock
The first place I would start in my search for passive income would be dividend stocks. This is where UK stocks excel, offering higher dividend yields on average than their US counterparts.
A quick look at the respective indices tells me that the returns provided by the FTSE 100 (3.54%) and FTSE 250 (3.07%) comfortably surpassed the S&P 500 (1.74%) and Nasdaq Composite (1.28%).
In particular, the higher concentration of value stocks in the FTSE 100 compared to the other indices means that London’s blue-chip benchmark is highly exposed to financials, energy and materials. At around 40% of the index, this is more than double the weighting of the S&P 500 in these sectors.
Many of these companies are defensive businesses that generate cash and pay large dividends, making them great options for passive income seekers. To highlight a few examples, lloyds bank offers a dividend yield of 4.33%, PA yields 3.9%, and red river sports a yield of 8.56%.
While I might be sacrificing growth opportunities in other sectors like technology, with passive income in mind, I think these are the types of names I’d like to see in my portfolio.
In addition, defensive investments often do better in downturns, as investors flee from more speculative plays to seek safety in high-quality companies. Amid concerns that both the UK and US could slip into recession this year, I am thinking of buying defensive stocks to weather the macroeconomic turmoil.
2.REIT
Another asset class that offers passive income is real estate investment trusts (REITs). They provide a convenient way to gain real estate exposure without the hassle of owning. It is definitely a more passive investment than a buy-to-let property.
Typically, a REIT will be listed on a stock exchange and pool investors’ cash to invest in property, giving shareholders indirect exposure. Often each REIT will focus on a particular type of property.
For example, Edison Real Estate Investment Company focuses on retail warehouses and yields 7.91%. Secondly, Custodian-owned income REIT it has a more diversified portfolio that encompasses industrial properties, office buildings and street-side retail. This REIT yields 5.86%.
There are signs that commercial property prices are weakening with trading at their lowest level in a decade. This could affect the exceptional returns offered by many UK REITs. However, they are an important part of my passive income portfolio because of the diversification they offer.
3. Dividend funds
Finally, a simpler solution to increase my passive income is a dividend stock fund. While picking individual stocks is the cornerstone of my investing strategy, I believe funds have their place as well.
Because of the low ongoing charge fees and simplicity, I think they can be great long-term buy-and-hold investments.
One high dividend fund I own is the Vanguard FTSE All-World High Dividend Yield UCITS ETF. Its three main holdings are the pharmaceutical company johnson and johnsonoil major exxonmobiland financial services giant JPMorgan Chase.
With a dividend yield of 3.73%, this ETF offers a way to own some of the highest profitable companies in the world.
