Income-Producing Assets

As we all know, the path to financial independence requires spending less than you make and investing the surplus in such a way that your money works for you. Income-producing assets (IPA) also known as income-generating assets are the key to the puzzle, whether you want to grow your wealth, accumulate a passive income stream or simply want to boost your annual income, these assets are quintessential for reaching your financial goals.

What Are They?

An IPA as the name suggests is something that produces an income, which for the most part is passive. By investing your money, time or both towards an asset, you can tailor it to produce a recurring income stream. Through doing this, you essentially begin to pay yourself an income that is passive, meaning that you can generate income while you are at work, sleeping, watching TV, walking the dog etc. 

What Types of Income Producing Assets are there?

There are numerous types of IPA that are accessible through different means. You can invest directly into an investment property and if it is positively geared, generate income from the rent. Alternatively, you could invest in a real estate investment trust (REIT) which is a managed portfolio of numerous real estate investments that distributes its yearly profit to shareholders in the form of a dividend. You can also attain dividend income from listed investment companies (LICs), exchange-traded funds (ETFs) and shares. Alternatively, if your risk tolerance is lower, you can use fixed income investments such as bonds that return consistent, predetermined returns.

How Do They Work?

IPAs may vary depending on which form you decide to invest into but for the most part, they operate in a similar capacity. You invest money and time towards something that initially, doesn’t produce any instant forms of income. You hold onto these investments and over a period of time, they produce a portion of your original investment back to you. Below I’ll give two examples:

Example 1: Investing in Dividend Shares

You purchase 1,000 shares of a blue-collar stock that produces a fully franked dividend of 5% per annum. Each share costs $10, meaning that you have invested $10,000. At the moment, you are down $10,000. However, during the end of the year, your stocks have grown 4% in value to be worth $10,400. You then receive your yearly dividend which is worth 5% of that. So in this instance, you make 5% of $10,400 which is $520. 

In this example, you have generated a passive income of $520, which is a 5.2% return on your original investment. Additionally, you have accumulated an additional $400 in capital. Assuming this dividend and annual growth rate continues over a long time frame, you can comfortably generate larger returns each year until eventually, the dividend yield can supplement your income. 

Example 2: Investing in Government Bonds

You deposit $10,000 into a 5 year Government Bond offering a fixed coupon rate of 4%. In exchange for allowing the government to borrow your principal deposit of $10,000 for a period of 5 years, they will pay you 4% of that amount twice per year until the bond reaches its maturity date. In the above example, you would receive 10 x 4% coupons over your 5 year investment period in half-yearly instalments. 

$10,000 x 0.04 = $400 (1 coupon)

Yearly Coupon Returns = $400 x 2 = $800 (2 coupons) 

Total Coupon Return on Investment = $400 x 10 = $4,000

Once you reach maturation, you also receive your principal sum of $10,000 back as well.

What’s the Best Income Producing Asset for Me?

This one depends on how much spare time you have, how much money you have, what your risk tolerance is and how much work you are willing to put in. If you have spare time, perhaps making a small business and following the digital entrepreneur route is a good way to go. If you don’t have the time, investing in an ETF or LIC can be an easy set and forget way to generate an income through dividends. If you are willing to put work into renovations, then investment properties could be right up your alley. Ultimately, the best IPA is the one that you can stick with and invest over the long term, as this will compound your returns and accumulate wealth. It could be one of these options or you can use multiple options to diversify your IPAs. 

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