Updated: November 13, 2020
For most people, passive income is the ultimate source of cash. It’s money working for you in the best possible way.
Fortunately, there are many sources of passive income.
If you’re a songwriter, then you’re probably receiving royalty payments. Or if you own a rental property, then the lease payments are your source of passive income.
But not everyone has the talent to compose music or write books for royalty income. And our finances might not yet be enough to buy real estate. In these cases, our best source of passive income would be dividend income.
What is dividend income?
Dividend income is money paid out from the profits of a corporation to the stockholders. This means you are a part-owner of a business and you earn a portion of that company’s profits.
This income can be a fixed percentage or a variable amount, which depends on the performance of the company. It can be given at regular intervals, usually quarterly, or at a random schedule as decided by the company.
For an individual, putting money in dividend-paying investments is the easiest and fastest way to create passive income for themselves.
And here’s a list of investments that you can choose if you want to earn dividend income.
1. Private Equity
Basically, this means becoming a silent partner in a business. An example would be how I provided my cousin seed capital to start her business in exchange for 10% of her company.
I let her run the business on her own. And every month, she would give me 10% of the net profit, which is the dividend income. This arrangement goes on as far as the business is running or if she decides to buy my shares.
2. Dividend-Paying Stocks
If you don’t know anyone willing to take you in as a silent partner for their business, then you can just go to the stock market and invest in companies that give out regular dividends.
If you’re looking at this as a long-term source of passive income, then it would be a good idea to buy blue-chip stocks. The highest dividend-paying stocks in the Philippines from recent years are DMCI Holdings (DMC), PLDT Inc. (TEL), and Manila Electric Company (MER).
Please note that these are common shares and dividend payments are not guaranteed. There can be years when they don’t pay anything at all.
3. Preferred Shares
If you prefer getting a fixed income, then you can invest in preferred shares in the Philippine stock market instead. These companies often have “Preferred” or “Pref” in their description.
Among those that paid the highest dividends in recent years are Petron Corp – Perpetual Pref. Series 2A/2B (PRF2A and PRF2B), Leisure and Resorts World Corp. – Pref (LRP), and San Miguel Corp Series 2-C Pref. (SMC2C).
It’s important to remember that preferred shares are not as easy to sell as common shares in case you need to dispose of and liquidate them.
4. Real Estate Investment Trust (REIT)
Real Estate Investment Trusts are investments that allow you to earn from large-scale properties without having to put out a lot of money. It’s like buying a small portion of the rental property business.
They provide regular income as the law requires them to pay out 90% of their earnings in the form of cash dividends. You can invest in REITs through the stock market. The first one that launched in the Philippines was AREIT of Ayala Land.
To learn more about REITs, you can read this: A Beginner’s Guide to REIT “” Real Estate Investment Trust Primer
5. Condotel Investing
A real estate rental property often doesn’t provide passive income because as the owner, you’d need to find tenants, maintain the property, and file taxes among other things.
If you’re looking for a purely passive real estate rental business, then you should consider investing in condotels.
Unlike REITs, you’re getting a titled property, while a company handles all the business operations. Plus, you’ll earn regular dividends regardless if someone stayed in your unit or not.
To learn more about condotel investing, you can read this: Real Estate Investing with Hotel 101
6. Investment Crowdfunding
Crowdfunding is similar to the first on our list, Private Equity, except that there would be hundreds or even thousands of you who are providing seed capital. And similarly, you earn regular dividends from the business profits.
One advantage of crowdfunding investments is that the minimum investment amount is small. For example, you only need P1,000 to start investing with Flint PH, which is a Philippine real estate crowdfunding platform.
Learn more about Flint PH here: How to Invest in Real Estate for Only P1,000
Learn more about Investment Crowdfunding here: Investment Crowdfunding in the Philippines
7. Pag-IBIG MP2
The MP2 Savings Program is a voluntary savings program for members who wish to save more and earn higher dividends than the regular Pag-IBIG Savings Program.
This is open to all active Pag-IBIG Fund Members. And also open to former Pag-IBIG Fund Members with a monthly source of income, including pensioners, regardless of age.
If you’re interested to invest in Pag-IBIG MP2, then you can get more information here: Pag-IBIG MP2 vs SSS PESO Fund: Which is Better?
Cooperatives also provide a way to earn regular dividend income. Its structure is almost the same as that of Investment Crowdfunding, except you can enjoy other benefits that the cooperative might provide to its members.
Learn more about cooperative investing here: Is Investing in a Cooperative a Good Form of Investment?
9. Savings and Loans Associations
Savings and loans associations are private, non-stock, and non-profit corporations that operate like a bank (but it is NOT a bank). They provide loans to their members. But more importantly, they provide a saving facility where you can earn regular dividends.
One example of this is AFPSLAI or the Armed Forces and Police Savings & Loan Association, Inc. which is supervised by the Bangko Sentral ng Pilipinas and one of the leading providers of financial products and allied services to the AFP, Army, Air Force, Navy, PNP, BFP, and BJMP.
Strictly speaking, the money you earn from bonds is interest payments. But I’m including it in this list because government bonds and some corporate bonds in the Philippines refer to those interest payments as dividends.
Bonds are also called fixed-income investments and they’re relatively safer than stock market and real estate investments, which provide regular cash flow for you.
You can learn more about them here: How to Invest in Bonds for Beginners
Where should you invest?
The answer, as always, depends on your financial goals. Determine which among them can give you the amount of cash flow that you need, after considering the amount you can invest and your risk tolerance.
For example, if you want to invest P10,000 and you’re a conservative investor, plus your goal is to use the money after 3 years, then your options are Investment Crowdfunding, Cooperatives, Savings and Loans Associations, and Bonds.
As the final criteria, I encourage you to invest where it is most convenient for you. Because investing should be a habit, and you’ll be more motivated to invest regularly where it is fast and convenient for you.