Renting a real estate property (residential or commercial space) is one of the best sources to earn extra income. Today, the demand for a rental house has increased due to migration of people from one city to another in search of jobs and various redevelopment projects in residential space. This provides a good opportunity to earn a decent income by renting the properties. In addition, the rent is increased by 8%-10% on a yearly basis which will keep on increasing the rental income.
Invest in monthly income plans (MIPs):
MIP is a debt mutual fund scheme that invests majorly into debt instruments and small portion in equity. Generally, 75%-80% of the total amount is invested into debt products and rest in equities. MIPs generate income in the form of dividends. The scheme gives the option of monthly, quarterly, half-yearly and yearly dividends. However, the income from the MIPs are not fixed, it depends on the availability of the distributable surplus with the mutual funds. The dividends earned from the MIPs are tax-free for the investors but the mutual funds house pays dividend distribution tax (DDT) of 28.84%.
Invest in corporate bonds and bank fixed deposits:
An individual can invest in corporate bonds and bank fixed deposits. Corporate bonds are debt securities issued by both private and public companies. Similarly, one can deposit his money with the bank under term deposit scheme. These investments give fixed return in the form of interest income. However, the interest earned on corporate bonds may be taxable or tax-free. Tax-free bonds are issued by public sector companies. On the other hand, the interest earned on bank fixed deposit is taxable. Therefore, one should consider post-tax return while selecting a corporate bond or bank fixed deposit.
A person should invest in stocks which have past records of giving consistent regular dividends. Generally, blue-chip companies pay regular dividends to their shareholders. In addition, one should invest in the stocks that are undervalued and has a good dividend yield. However, dividends can act as a better source of additional income only if one has built huge investment portfolio (in terms of value). For example, if a person has purchased share of the companies mentioned below.
|Particulars||Coal India||REC Ltd||Indiabulls Housing Finance Ltd|
|No of shares||500||500||500|
|Interim dividend per share* (Rs)||27.4||12||45|
|Final dividend per share* (Rs)||-||5.1||-|
|Total divided per share* (Rs)||27.4||17.1||45|
|Total dividend earned (Rs)||13,700||8,550||22,500|
|Dividend Yield (%)*||8.99||6.29||5.95|
Source: BSE * for FY16.
The above table shows that 500 shares of Indiabulls Housing finance limited would have resulted in dividend amount of Rs 45 per share. The total dividend generated by the investment would be Rs 22,500. Similarly, one would have earned Rs 13,700 for owning Coal India Limited shares and Rs 8,550 for REC Ltd. Coal India LTD has given the highest dividend yield of 8.99% followed by REC Ltd - 6.29% and Indiabulls Housing Finance Ltd - 5.95%. The total dividend earned depends on the number of shares owned by a person of the company concerned.
Building a passive income stream is a great way to reduce the burden of increasing expenses. Passive income can act as the only source of income in case the person is laid off from his job or physically not able to work in the future. Real estate is a solid stream to earn passive income in the form of rent. Similarly, one can invest in stocks and monthly income plans. However, one has to keep track of the market to check out the returns on their investment. Otherwise, if a person wants to avoid risks then he can invest in debt instruments like corporate bonds and bank fixed deposits.
The author, Rajas Pendnekar is Blogger, IIFL.