Thanks to a sea change in investment markets in 2022, I’m pumped about the potential for passive income in 2023. That’s because rising interest rates have altered the asset landscape, delivering exciting opportunities for investors.
What’s so great about passive income?
Passive income is unearned, so it doesn’t come from working. Popular examples of unearned income including interest paid by cash deposits, dividend income from shares, rental income from property, and interest from corporate and government bonds.
I’m a huge fan of passive income — as is my hero, 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 lies at the heart of my long-term investment strategy.
Yields soar for cash and bonds
The big problem for income-seeking investors is that global interest rates hit rock bottom 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 rises.
Hence, interest rates (and savings rates) have soared worldwide. For example, the UK base rate has shot up from 0.1% a year in late 2021 to 3.5% today. Likewise, the Fed Funds Rate has leapt from a range of 0%-0.25% to 4.25%-4.50% today.
Another positive for passive-income fans is that rising interest rates have lifted bond yields. For example, an ultra-safe 10-year UK gilt now offers a yield of 3.3% a year, versus near-zero at its 2020 lows. Similarly, a 10-year US Treasury bond pays 3.4% a year — over 10 times its 2020 low of 0.32%.
This means that cash deposits and bonds can now pay out considerably more interest. That’s good news for savers. Alas, sky-high inflation is eating away at the future value of these savings, which is nasty.
Share dividends are soaring
Another bonus is that share dividends — regular cash sums paid by companies to shareholders — are riding high. One estimate is that UK share dividends could hit a record peak of £83.8bn in 2023, versus £79.1bn in 2022. Hence, my wife and I have been buying various dividend dynamos in the FTSE 100 and FTSE 250 to grab our my share of this cascade of cash.
Pensions are also set to surge
The over-55s own perhaps four-fifths (80%) of all UK financial assets. I’m set to enter this group in the spring (yikes!), but have decided not to draw down my previous pensions yet. However, my wife was made redundant and given early retirement in spring 2021, with her company pension due to be paid from mid-2023.
With her old-school final-salary pension being index-linked, her pension uplift could be 10%+ this year. But we have no plan to spend this brand-new stream of passive income. Instead, we will use some to offset our ever-rising bills, with the rest invested to produce more future income.
In summary, lower asset prices and higher interest rates have pushed up yields from cash, bonds, and shares. Also, state and many company pensions are set to rise steeply. This is all promising for lovers of passive income!
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.