We all have dreamt of reaching the point where your passive income exceeds expenses, allowing you to live purely off your returns and thus reach the holy grail of financial independence.
In this article, we will discuss the pros and cons of three popular choices for building up a regular income stream: stocks, bonds, and properties.
Stocks – Dividend Stocks And Growth Stocks
Generally, there are two main types of stocks to consider: dividend stocks and growth stocks. Both offer unique advantages and disadvantages.
Dividend Stocks
Dividend stocks are stocks of companies that pay a portion of their profits back to shareholders in the form of dividends. These dividends can provide a steady source of income to investors, making them a popular choice for those looking for reliable cash flow.
Some popular dividend stocks include the three local Singapore banks, as shown below:
Source: Syfe
For further research, you may use tools such as Tipranks or Dividend.com to compare yield.
Pros of Dividend Stocks
Dividend stocks are often issued by well-established companies with a history of stable earnings and dividends. This makes them a more stable investment option compared to growth stocks, which can be more volatile.
Additionally, even though dividend stocks are generally considered to be a more conservative investment option, many dividend-paying companies also have the potential for long-term growth. This can provide investors with both income and capital appreciation over time.
Read Also: Guide To Dividend Investing In Singapore
Cons of Dividend Stocks
While dividend stocks can provide a source of income, they may not offer the same potential for growth as growth stocks and may have limited growth potential. This is because companies that pay dividends often have mature business models that may not be expanding at the same rate as younger, more innovative companies.
Additionally, because dividend stocks are often considered to be more stable than growth stocks, they can be particularly vulnerable to changes in interest rates. If interest rates rise, investors may shift their money to other investments with higher yields, causing the value of dividend stocks to decline.
Note: Higher Yields Do Not Equate To Better Investments
One of the key points to note for dividend investing is that stocks with higher dividend yields do not necessarily equate to a better investment option for dividend investors.
In fact, purely investing in the highest yield stocks may actually be dangerous. This is because a company could hypothetically pay a really high dividend, but if the share prices drop significantly, the actual dividend yield may end up being low.
Additionally, whilst dividend income in Singapore stocks are tax-exempted, non-US tax residents will be charged a 30% withholding tax for dividend income on US stocks. For further information such as the key financial ratios to look out for, you can read our Guide to Dividend Investing.
Growth Stocks
Growth stocks are stocks of companies that have the potential for high growth, either because they are in early stages of development and may not yet be profitable, or they are in an industry that is growing at a rapid pace. Whilst technically the ownership of growth stocks does not provide a passive income per se, one can periodically sell off shares to fund expenses and thereby receive “passive income”.
Pros of Growth Stocks
The primary advantage of growth stocks is that they offer the potential for high growth. This can provide investors with significant capital appreciation over time, making growth stocks an attractive option for those looking to grow their wealth.
These stocks are often issued by young, innovative companies that are disrupting their industries. Investing in these companies can be exciting, as they often have the potential to revolutionize their respective fields.
Cons of Growth Stocks
Growth stocks are often more volatile than dividend stocks, as their value is tied to the company’s growth potential rather than its established earnings history. These companies are more likely to be vulnerable to changes in the market or unexpected setbacks, and their stock prices could potentially plunge in times of distress.
Bonds – Government And Corporation Bonds
Bonds are a type of debt security that represents a loan made by an investor to a borrower, usually a government or corporation.
In exchange for the loan, the borrower pays interest to the investor. Bonds are considered a safer investment option compared to stocks, but they typically offer lower returns. Some examples of bonds are government bonds (e.g. Singapore Government Securities), corporate bonds, and treasury bonds.
One popular investment strategy for holding bonds is to consider the 60/40 portfolio, which refers to allocating 60% of one’s portfolio to large-cap equities and 40% to bonds like treasuries or investment-grade corporate bonds. This will provide your portfolio with a mix of both worlds: the high growth of stocks, and the safety of bonds.
When considering bonds, you may also consider fixed deposits, which offer higher returns than savings accounts whilst also being virtually risk-free. However, do note that in general, bonds may still provide higher yield than fixed deposits.
Top bonds to buy as of Apr 2023/ Source: Yahoo! Finance, Morningstar, and company websites:
| Bond | Description | Yield |
| 10-Year Treasury Note (^TNX) | Benchmark Treasury bond. | 3.52% |
| Series I Savings Bonds | U.S. Government bonds issued at a fixed interest rate for 30 years, plus a variable inflation rate | 6.89% |
| iShares TIPS Bond ETF (TIP) | Fund holding Treasury inflation-protected securities. | 6.12% |
| Nuveen High-Yield Municipal Bond Fund (NHMRX) | Fund that invests in lower-quality municipal bonds. | 5.13% |
| Vanguard Short-Term Corporate Bond ETF (VSCH) | Fund that tracks the Bloomberg 1-5 year corporate bond index. | 5.00% |
| Fidelity Short-Term Bond Fund (FSHBX) | Fund managed to have similar interest rate risk to the Bloomberg Barclays U.S. 1-3 Year Government/Credit Bond Index. | 4.41% |
| Guggenheim Total Return Bond Fund (GIBIX) | Bond fund focused on under-researched areas of the fixed income universe, including sectors not included in benchmark indices. | 4.36% |
Banks with best fixed deposit interest rates/ Source: Dollars And Sense
Pros of Bonds
Bonds are considered a safer investment option compared to stocks. They are backed by the borrower’s ability to repay the loan, and in the case of government bonds, they are considered to be virtually risk-free.
Bonds also provide a regular income stream through interest payments. This can be a reliable source of income for investors who are looking for steady returns.
Overall, investing in bonds helps to mitigate the risk of a single bond defaulting, as it allows for diversification across different issuers and maturities.
Cons of Bonds
Bonds typically offer lower returns compared to stocks, as they are considered to be a safer investment option. The Singapore 10Y government bond yield for example has been hovering between 1.5% to around 3% recently.
Additionally, there is typically a lockup period ranging from 6 months to a few years, and early withdrawal would incur a penalty. This makes bonds and fixed deposits more illiquid than stocks.
Properties – Rental Income And Capital Appreciation
The two main ways one can earn a regular income through property are rental income and capital appreciation, and there are endless strategies for how you can achieve this.
Some examples include:
1) Renting out a room in your homestay property
2) Buying two properties and staying in one whilst renting out / flipping the other
3) Venturing into commercial and industrial properties if your family already has properties under your names and you do not wish to incur Additional Buyer Stamp Duty (ABSD).
Pros of Properties
Not only could you receive regular rental income for the duration of the lease period, there is also potential for capital appreciation on the property itself. Overall, Singapore house prices grew by an average of 4.8% from 1976 to 2022.
Singapore resale non-landed property price index/ Source: SRX
Singapore resale HDB property price index/ Source: SRX
For those venturing into commercial or industrial properties, no ABSD will be incurred for owning multiple commercial or industrial properties. Additionally, Seller’s Stamp Duty (SSD) is not applicable for commercial properties. However, SSD is applicable for Industrial Properties that are sold before the holding period of 3 years ends.
Cons of Properties
If you are going for private residential property, the initial down payment would be expensive, especially as the cash portion needs to be at least 10% and the total down payment portion is 25%.
Additionally, one would be unable to sell a property before 3 years without incurring the Seller’s Stamp Duty. The buying and selling process is slow as well, often taking months to complete.
For commercial or industrial properties, the property tax is a flat 10%, which is higher than residential property tax in some cases. In addition, unlike capital gains which are not taxed in Singapore, rental income is taxed.
Owning a property also requires ongoing maintenance and management. As a landlord, this also involves searching for tenants once a tenant’s lease has expired, and there may be loss of rental income between tenant leases.
Lastly, for commercial and industrial properties, knowledge of the industry becomes even more important for understanding whether or not the property is a good investment or if it is able to provide good rental yield. Without the right knowledge, one could potentially make an expensive mistake.
Another Option That’s Possibly The Best of All Worlds: Funds
A cheat code of sorts would be to invest in funds, allowing you to enjoy the returns of the instrument whilst reducing risk by being diversified, all whilst requiring lower upfront capital than buying one lot of shares or owning a property. Be it stocks, bonds, properties, or REITs, there is no lack of funds for each category.
Basically a fund is a pool of money managed by a professional investment manager, often with a theme such as “tech stocks”, and holding anywhere from 50 to 200 stock positions, or even more.
There are two main types of funds, mutual funds and ETFs. In short, the key difference between the two are that ETFs generally track an index and require less management (and thereby less fees), whilst mutual funds aim to outperform the market with more active management (thereby incurring higher fees).
Though funds are generally perceived as safer than stocks, they can sometimes show returns as high as stocks themselves.
Source: Phillip Capital
However, do remember the age-old wisdom that the past performance is not an indicator of future performance. In fact, the gold standard for funds, the S&P 500, outperformed every single actively managed fund in the past five years, according to the NY Times. The S&P has provided an annualized average return of around 11.88% from inception (1957) to 2022.
Pros of Funds
Funds are more diversified than buying individual stocks, which can help to reduce risk and provide a steady income stream. Professional fund managers have years of experience and expertise in the investment industry, and can help to manage and in certain cases rebalance the portfolio.
Cons of Funds
Funds charge fees for management and other expenses, which can eat into your returns. In fact, due to the fact that in the long run most actively managed funds are unable to beat the S&P 500, studies have shown that the lower the fees, the better the return on investment.
Funds with lower costs have outperformed more expensive ones/ Source: Vanguard
The reason higher-cost funds generally underperform lower-cost funds is because the fund managers charging these costs have a difficult time adding enough value to overcome the additional expense. Even if fees seem small, when compounded over 20 years, there could be a major impact on your portfolio returns.
The impact of small fees on portfolio returns could be significant when compounded over 20 years/ Source: US Securities and Exchange Commission
Churning, turnover, and window dressing may happen if your manager is abusing their authority too. This includes unnecessary trading, excessive replacement, and selling the losers prior to quarter-end to fix the books.
Another reason is that investors have lack of control or limited control over the investments made by the fund manager, which means that they may not agree with all investment choices.
The Verdict: Find The Investment Type That Is Best Suited For You And Your Needs
Ultimately, the choice between stocks, bonds and properties for generating a regular income stream depends on your investment goals, risk tolerance, and financial situation. Below are some factors to consider when deciding which investment option is better for generating a regular income stream.
Summary of the pros and cons of each type of instrument in general:
| Attributes | Stocks | Bonds | Properties |
| Capital Appreciation | High | Low-to-Medium | Medium-to-High |
| Safety | Low | High | High |
| Volatility | High | Low | Medium |
| Regular Income Stream | Poor to Medium | Good | Good |
| Capital Required | Low Capital | Low Capital | High Capital |
| Liquidity | High Liquidity | Medium Liquidity | Low Liquidity |
| Investment Horizon | Short Term | Medium Term | Long Term |
Risk Tolerance
One of the most important factors to consider when building a regular income stream is your risk tolerance. Stocks and properties are generally considered riskier investments than bonds, but they also offer higher potential returns. Your risk tolerance will depend on your financial goals, investment experience, and overall financial situation.
Diversification
Diversification is critical when building a regular income stream. A diversified investment portfolio can help reduce risk and maximize returns. It’s important to consider investing in a mix of stocks, bonds, and properties to achieve a well-balanced portfolio.
Additionally, diversification within each asset class is also important. For example, within stocks, you may want to consider investing in a mix of large-cap, mid-cap, and small-cap stocks, as well as different sectors and industries.
Volatility and Regularity of Income Stream
Volatility is one of the key factors in determining if you will be able to achieve a stable income stream from your portfolio. If your portfolio consists mainly of highly volatile stocks, even if the capital appreciation in the long run is high, constant fluctuations may mean that you may not be able to cash out regularly. This is why it is not advisable to depend on the returns from risky stocks to pay your mortgage or bills.
Liquidity And Investment Horizon
Finally, when building a regular income stream, it’s important to consider the liquidity of your investments, and how long you are willing to hold them for.
Stocks would have the highest liquidity, followed by bonds and properties, both of which would incur penalties if you have to sell before maturity. Additionally, different instruments are suitable for short and long investment horizons. If you have a shorter investment horizon, you may want to consider investing in bonds and high-quality dividend stocks.
If you have a longer investment horizon, you may be able to take on more risk and invest in growth stocks and properties that have the potential for higher returns over the long term.
Start Investing And Be Consistent
Overall, the key to building up a regular income stream is firstly and most importantly to start investing, and once you start, to consistently invest in order to dollar-cost-average any market fluctuations.
There’s never a perfect time to start investing, and as studies have shown, time in the market is more important than timing the market.
Read Also: 5 Things To Know Before Investing In A Commercial Property In Singapore
The post Stocks, Bonds Or Properties? The Pros & Cons For Each Type Of Investment For Regular Income Stream appeared first on DollarsAndSense.sg.
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