Passive income and wealth

“Work smarter not harder.” The famous words of Allen F Morgenstern can be interpreted in many ways. Most times it is interpreted as finding methods to reduce the effort required to complete a physical task. Many people neglect the fact that this phrase can also be applied to achieving your financial goals.

Wealth creation is often the overarching theme of our financial goals and financial planning. But, how do we go about achieving this goal most effectively and with the least amount of effort? This can be achieved by creating passive income streams.

Traditionally, many believe that passive income can only come from having a rental property or investing in a business without active participation in the operations. However, the passive income that can be obtained from financial investments should not be overlooked.

Starting down the path to creating passive income will require an initial investment of your time, money, and effort. This will allow you to create the pool of funds needed to begin investing. This is no different from saving to purchase that rental property before being able to earn rental income. It is also easier to begin investing with a smaller sum of money than would be needed to purchase the property.

Once your active income has allowed you to earn and save a pool of funds, the portion saved can now begin to work for you. This is where the passive income can help in achieving wealth creation. For creating passive income with financial instruments, the investor should look for instruments which make periodic payments that can create a stream of income with little or no effort needed after the initial investment. This now becomes an additional (passive) stream of income.

Financial assets which allow you to generate a passive income include:

GLOBAL BONDS

Ordinary shares (with a history of consistent and attractive dividend payments) Preference shares Fixed-income money market instruments

Investing in global bonds, preference shares and fixed-income money market instruments will allow the investor to project and plan for their income as the interest amounts and interest payment dates are known. There may be some investments with slight variations but get the details on the investment and speak with your investment advisor.

For ordinary shares, a dividend payment is not an obligation but is paid at the discretion of the board of directors. Because of this, a company may opt not to pay a dividend as there is no contractual commitment to do so. For someone looking at creating passive income, it is very important to look at the dividend payment history of listed companies to determine which ordinary shares have a record of consistent payment. If a company exhibits a pattern of paying consistent dividends, then one must dig deeper to see if the dividend yield is attractive. One way to do this is to compare the yield with that of a preference share. If the yield is lower than that of a preference share, then the uncertainty of whether you will be receiving a dividend payment will make the ordinary share less attractive. If, however, the ordinary share consistently produced

a high dividend yield, then this could be a good source of passive income. In addition, recall that some shares pay dividends in currencies which may be stronger than the local currency. This can help to increase the value of your passive income stream.

After making the initial investment, be sure to continue saving from your active income and pumping those funds into more investments which create passive income. The more you have invested is the more you can earn. Aim to diversify your investments across different asset classes, industries, and countries. By doing this you will limit overexposure to a single asset should economic conditions affect the ability of one asset to pay interest.

The now passive income (dividends from shares and interest payments from global bonds and money market instruments) should also be used wisely. If you have debts at high interest rates, look at reducing those debts using passive income. Clearing these debts will allow you more savings to invest with more money to work for you.

Also look at reinvesting interest and dividends to achieve a compounding effect. This can be done by the investor as income is received or it can be automated. An example of this being automated is in the form of a Dividend Reinvestment Plan (DRIP). This programme allows investors to automatically reinvest cash dividends to buy additional shares of the underlying stock/share which they originally invested in. At each future dividend payment date, the dividends will be paid on a greater number of shares.

Whether you invest in a business, rental property or financial instrument, the goal is to create passive income that allows you to earn without having to exert additional effort above and beyond what is needed to generate your active income. Time, money, and effort can be limiting factors for achieving our goal of wealth creation. Find ways to reduce the time and effort needed while maximising your earnings on the way to achieving the ultimate financial goal, wealth.

Dwayne Neil, MBA, is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling. com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.

For someone looking at creating passive income, it is very important to look at the dividend payment history of listed companies to determine which ordinary shares have a record of consistent payment. If a company exhibits a pattern of paying consistent dividends, then one must dig deeper to see if the dividend yield is attractive. One way to do this is to compare the yield with that of a preference share. If the yield is lower than that of a preference share, then the uncertainty of whether you will be receiving a dividend payment will make the ordinary share less attractive