Five tips to generate secondary income from your investments

In India, investment strategies and portfolio construction are disproportionately focused on capital gains and most investors pay little attention to the recurring cash flow their investments can generate. This forces them to take undue risks with their money and exposes them to asset price volatility.

Additionally, investors need to sell their assets to make capital gains which may not suit everyone. Many investors, especially older folks, would prefer an investment portfolio that provides a secondary source of income or cash flow regardless of the market cycle. In many instances, cash flows from investments can also be more tax efficient as short-term and long-term capital gains are taxable.

A good cash-generating portfolio can also allow you to retire early and pursue interests and hobbies that are not possible while you are in a full-time job or employment.

Here are five ways to generate good recurring cash flows from your investment:

1. Invest in high dividend-yielding stocks 

Stock prices in India remain very high compared to historical levels and many other large markets. This has translated into low dividend yield on a diversified equity portfolio such as benchmark indices. For example, a portfolio that mimics BSE Sensex currently offers a dividend yield of 1.15 percent which translates into an annual dividend income of Rs 11,500 for an investment of Rs 10 lakh. This is too paltry. 

But there are dozens of stocks in the market with dividend yields of 3 percent or higher. According to data from BSE, currently, 26 stocks in the BSE500 index offer a dividend yield of higher than 3 percent.

Given this, it’s not very difficult to create a portfolio of 8-10 stocks that can generate an annual dividend income of Rs 50,000 in the first year on an investment of Rs 10 lakh.

This initial dividend will grow in line with the growth in the company's profits and become a large annual cash flow over the next 4-5 years.

Also Read: Ten best dividend-paying stocks right now

2. Invest in investment trusts such as RIETs or InvITs 

A good way to generate annual dividend income at low price risk is to invest in real estate investment trusts (RIETs) or infrastructure investment trusts. As the name suggests these are listed investment vehicles or trusts that own income or rent-generating assets such as office buildings, hotels and infrastructure assets such as highways, power plants or power grids. They are pooled in investment by mutual funds and unit holders or shareholders get the cash generated by the underlying asset in the form of dividends. 

According to SEBI regulations, REITs must pay out 90 percent of their rental income in dividends. For example, Embassy Office Parks RIET – the country's largest listed investment trust – currently has a dividend yield of 7.5 percent, much higher than most listed stocks in the country. Similarly, India Grid Trust offers a dividend yield of 2.6 percent while IRB InvIT Fund is currently trading at a dividend yield of a juicy 10.3 percent. Brookfield India Real Estate Trust offers a dividend yield of 5.2 percent at its current share price.

3. Invest in dividend-yielding mutual funds 

If stock picking is not your forte or you find it too intimidating then investing in a dividend yield mutual fund scheme is a great option. These are thematic funds that invest in companies with the potential to generate high and recurring dividend income year after year. This is then distributed to unit holders in the form of quarterly or annual payouts. The dividend payouts are however not guaranteed and depend entirely on the performance of the underlying companies and market movements. Opt for dividend options while investing in these schemes.

Also Read: Five tips to build a large retirement corpus

4. Invest in residential real estate 

Rental income from residential real estate is a good way to generate a recurring monthly income. Typically, the rental yield on residential property is around 2-3 percent in bigger cities, much less than the interest on home loans and will be insufficient to cover monthly EMIs. But while the EMIs on home loans are fixed over the tenure of the loans, the rental income typically grows at the rate of 8-10 percent annually. 

Secondly, you can generate higher yields by investing in a property in a well-established locality and making incremental investments in the property to make it more attractive to potential tenants.

This way it’s possible to generate a rental income that exceeds the monthly EMIs in seven to eight years. 

5. Invest in high-interest-yielding corporate deposits 

The interest in bank fixed deposits and post office FDs remains low and hardly compensates even for the inflation in the economy. This makes them unattractive to most investors and savers. 

However, it’s possible to generate higher interest by investing in corporate or company fixed deposits. For example, Shriram Finance Company offers an interest rate of 9.4 percent on a 5-year cumulative fixed deposit. Similarly, Muthoot Capital is offering an annual interest rate of 9.9 percent on 5-year cumulative deposits. PNB Housing Finance on the other hand is offering 7.75 percent interest on its fixed deposits.

Happy Investing!

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist). 

Also Read: Five financial ratios to pick value stocks in a volatile market

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