How can I earn $10,000 each year from passive income?

The idea of earning passive income appeals to all of us - especially during a cost of living crisis, and our investments can hold the key to pocketing extra cash.
By · 26 Sep 2023
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26 Sep 2023 · 5 min read
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One of the great aspects of investing is that our portfolio can be a source of passive income. I’m looking here at how much you’d need to have invested to earn passive income of $10,000 in a year – and I’m talking about ongoing income such as interest, dividends or fund distributions as opposed to capital gains. After all, we want to keep as much of your money invested as possible so it continues to generate returns.

Why $10,000? Because right now that sort of money would go a long way towards paying household bills. Or it could fund a decent family holiday each year, or help send the kids to the school of your choice.

As we’ll see, earning $10,000 in passive income doesn’t just depend on the investments you select. It can also hinge on how those investments are taxed. So it can pay to speak to your accountant for strategies to minimise tax on your returns. 

Options to earn $10,000 annually

For the purpose of this analysis I’m going to overlook residential property. Yes, I know a rental property can be a source of regular, passive income.

However, for most people, investing in property also means taking on a significant debt, and committing to the regular upkeep of the place. The costs involved can see a property deliver negative cash flow, at least until it is owned debt-free.

That being the case, I’ll focus on other investments: First up, savings accounts.

What if I invest in a savings account?

After several years of interest rates at record lows, we are finally seeing savings accounts paying solid returns. 

If you’re prepared to shop around it’s possible to find rates topping 5.50% with the likes of Rabobank, Macquarie Bank and Bank of China[1].

Assuming you can score a rate of 5.50%, you would need savings of $181,818 to earn interest income of $10,000 annually.

However, there can be strings attached to earn this rate.

Many savings accounts only pay bonus interest if you make minimum monthly deposits, and/or limit withdrawals.  If you can’t keep up with these conditions month after month, you’re likely to earn a far lower base rate.

If you’re prepared to settle for a slightly lower rate, it is possible to earn a decent return without the need to meet various conditions. Unity Bank’s MoneyMAX account, for instance, pays 5.0% with no strings attached. At that rate, you’d need $200,000 on deposit to earn passive income of $10,000 annually.

Alternatively, term deposits can be worth a look. Plenty of providers are paying above 5.0% across a range of terms. What’s especially interesting is that you can earn in excess of 5.0% on 5-year terms with the likes of Judo Bank (5.20%) and Rabobank (5.10%). Five years is a long time to have your cash locked away, so you need to be confident you won’t have to dip into the deposit early, which risks having your return penalised. But with plenty of economists tipping rates will fall in 2024, it could be an opportunity to lock into a higher-than-market rate over time.

The beauty of savings accounts is that the Financial Claims Scheme (FCS), which is a government-backed safety net, applies for deposits up to $250,000 per account holder per authorised deposit-taking institution (ADI). So, we’re talking about a very safe investment.

The downside is that interest on savings accounts is fully taxable. Passive earnings of $10,000 could be whittled down – almost by half, if you are a high income earner.

What if I invest in shares?

Shares don’t just have the potential to deliver capital growth. Shareholders can also receive twice-yearly dividends.

The drawback is that dividends (like capital growth) are not guaranteed.

Dividends are paid at the discretion of the board of directors. As we saw through the pandemic, some blue chip companies opted to preserve their cash by opting out of paying dividends.

Thankfully, those extenuating circumstances are behind us. But COVID was a powerful reminder that listed companies don’t have to pay dividends. They can also decide to increase or reduce dividend payouts in line with the company’s trading results and future plans.

That said, some companies have a stronger reputation than others for paying dividends. Some of the leading dividend payers over the past 12 months include:

Company                      Dividend yield

Woodside Energy          9.01%[2]

BHP                              5.91%[3]

NAB                              5.53%[4]

Based on these yields, if I wanted passive income of $10,000 a year,  I would need to hold at least $110,987 worth of shares in Woodside, or $169,204 in BHP stock, or NAB shares worth $180,831.

If the dividends are fully franked, meaning they have been paid out of profits on which the company has paid tax of 30%, they can be lightly taxed in the hands of shareholders. Low income earners can even receive a tax refund for the company tax paid, which is a significant boost to passive income without an associated tax bill.

There is a catch to this

Dividend yields are calculated based on the cash dividends paid – which the Board decides as a cents-per-share figure, expressed as a percentage of the company’s current share value. If a company’s share value falls, its dividend yield rises.

An example of this is listed miner Yancoal. As I write, its current dividend yield is a whopping 22%[5]. On the face of it, you would only need to invest $45,454 to earn $10,000 in dividends over the past year. The reality though is that Yancoal’s share price has dropped from almost $7 in 2022 to about $5 in September 2023. What investors may have gained in yield, they have lost in the stock’s capital value.

This highlights the downside of focusing on one particular company, or even a small handful of companies, as a source of passive income. Without diversification you are intensifying the risk of your portfolio. And that risk could include a lower than expected dividend payment.

Broadly speaking however, when a company pays fully franked dividends, the tax savings mean you can have less invested and still earn more after-tax than if you had the same amount of money in a savings account.

What about ETFs?

One aspect of exchange traded funds (ETFs) that has seen Aussie investors flock to this type of investment is the instant diversity they offer for very low fees – a cost that can be lower than the brokerage associated with spreading your money across individual companies.

Better still, many ETFs pay quarterly distributions. This makes ETFs a more regular source of passive income than dividends, which are paid twice-yearly at best.

How much passive income you will earn with an ETF depends on the fund you select, and its underlying investments.

As a guide, over the past 12 months the Vanguard Australian Shares High Yield ETF has paid four distributions totalling $3.41 per unit[6]. Based on its trading value at the time of writing in mid-September, this works out to a yield of 5.02%[7]. On that basis, investors would need to have around $199,203 invested in the ETF to achieve a passive income of $10,000.

Here too the after-tax income can vary depending on the ETF. Investors can receive franking credits attached to the shares held by the ETF, which can make this sort of investment very attractive to those looking for passive income. The thing to be mindful of is fund fees. Yes they can cost less than brokerage to buy individual shares. But brokerage is a one-off cost (if you hang onto the stock) while fund fees are a recurring expense that you pay every year that you own units in the ETF.

How can I ramp up passive investment income?

Passive income is especially important when we are in retirement. Until then, a regular pay packet may mean you don’t need passive income from your investments. If that’s the case, it can make a lot of sense to reinvest returns and let compounding work its magic.

It’s a strategy that can turbocharge the capital value of your investments, which in turn, will boost the passive income earned when the time comes that you need the money to live on.

*Share and ETF values as at 13 September 2023









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Effie Zahos
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