How To Build The Best Passive Income Portfolio For Your Future Self

Imagine a future where your money works tirelessly for you, generating income streams while you indulge in the joys of life. But how does one construct the passive income portfolio tailored to the needs and aspirations of one's future self? This question resonates deeply with those yearning for financial freedom, whether it's the dream of early retirement, the desire to travel the world or the aspiration to forge a path as an entrepreneur.

Building your passive income portfolio isn't just about maximizing returns; it's about aligning your investments with your long-term goals and values. It's also about striking a balance between risk and reward, diversifying across asset classes and harnessing the power of compounding to propel you towards financial liberation.

Here’s how you can grow your passive income portfolio in Singapore. 

Table of contents

• Earn rental income
• Earn dividend income from stocks
• Earn dividend income from ETFs
• Earn regular coupon payments from bonds
• Robo-advisors
• Earn monthly payouts with an annuity plan
• How much passive income do you need?

6 ways to build your passive income portfolio

#1: Earn rental income through property ownership

One straightforward way to earn passive income is to rent out your home (or rooms in your home). 

The amount you bag in rental income would depend on the current demand in the property market, as well as factors such as the type of property, condition of the home, location and more. 

Keep in mind that rental income isn’t immediately profit-generating. You have to factor in your home loan payments as well as the cost of stamp duty and home renovations or repairs. Over the long-haul, your profits will grow after the rental income has compensated for all the costs incurred. 

To become an ace at investing in property, check out our guide to property investing here. 

#2: Dividend income from stocks 

Buying a million-dollar home isn’t something you can do the very next day. But what you can do is invest in stocks that give out dividends.

Companies pay their shareholders dividends each year. However, not all companies pay dividends and nor are they obliged to do so.

So, what counts as a high dividend yield?

A good gauge would be 4% returns and above. To build a passive income portfolio, there are two main types of stocks to consider: Real Estate Investment Trusts (REITs) and blue chip stocks. 

REITs are known to have high dividend yields of 4% to 8%, because it is compulsory for them to distribute at least 90% of their taxable income each year. When you invest in a REIT, you are investing in a company that is essentially a landlord, collecting rent and distributing the rental income back to shareholders as dividends. 

Blue chip stocks refer to large and established companies that retail investors would easily recognise. Think along the lines of DBS, OCBC, CapitaLand, Sheng Siong, Dairy Farm, Singtel and more.

Over in the U.S., blue chip stocks include Apple, Coca-Cola, Procter & Gamble, McDonald’s, Berkshire Hathaway and more. These blue chip stocks have a history of rewarding shareholders with handsome dividends. 

These dividends are paid out periodically — this could be once a year, semi-annually or even four times a year.

Some companies also offer scrip dividends, where you receive dividends in the form of shares. The payment date varies from stock to stock and you can find the dividend payout date based on the information found on their site.

#3: Dividend income from Exchange Traded Funds (ETFs)

If you’re not comfortable selecting a single stock, or a handful of stocks to make up your dividend portfolio, you can instead consider investing in ETFs. ETFs are a basket of securities, offered at an affordable price, that seek to track an index. Like stocks, ETFs are listed on the stock exchange and can reward their unitholders with dividends. 

For example, Nikko AM STI ETF and SPDR STI ETF both track the Straits Times Index (STI) — an index comprising of the top 30 stocks in Singapore.

Such ETFs gives you exposure to the top 30 companies in Singapore while reaping dividend income each year.

For example, in Jan 2024, Nikko AM STI ETF gave S$0.0768  per security. This means if you hold 10,000 units of Nikko AM STI ETF, you’d get a total of S$768 in dividends that year. 

When investing in dividend-yielding stocks or ETFs, the sooner you add them to your portfolio, the faster you can tap on the power of compounding to grow your wealth.

This is particularly so in your younger years, when you don’t rely on the dividends for income, but re-invest them instead.

#4: Receive regular coupon payments by purchasing bonds 

Bonds, or fixed income products, are considered to be one of the safer investment options. 

When you purchase a bond offered by a company, you are effectively lending your money to the company, in return for coupon payouts of a fixed amount.

With bonds, you have greater certainty and visibility over your coupon payouts as well as the date of payouts. 

Let’s take the wildly oversubscribed Astrea VI bonds, for example. If you were successfully allocated Astrea VI bonds, you’ll receive 3% of your principal amount semi-annually, on 18 March and 18 September each year. Your principal amount can be redeemed at the end of five years, or up to 10 years.

A popular low-risk bond is the Singapore Savings Bonds (SSBs) that offers historical returns ranging between 2% to 3%, at little to no risk. 

However, there is less liquidity when it comes to bonds. Although they can be bought and sold on the open market, there could be a lack of buyers willing to purchase the bonds you’re holding.

Also, you have to be prepared to hold the bond till maturity. With the Astrea VI bond, bondholders have to be prepared to hold it for at least five years.

#5: Generate income via a fund or robo-advisor

Besides ETFs, there are also mutual funds or unit trusts that you can purchase. This can be purchased through an investment platform, robo-advisor or insurance company. 

A handful of robo-advisors also have income-generating portfolios available. 

For example, StashAway’s Income Portfolio aims to generate income by investing in ETFs that consist of bonds, REITs and dividend stocks.

There is no minimum deposit amount required for the Income Portfolio.

To receive the dividends to your bank account, your Income Portfolio needs to generate a minimum of S$20 in dividend payouts on a monthly basis. Anything  below this amount during a calendar month will automatically be reinvested.

As the dividend yields and payout schedule is determined by fund managers and are subject to change, you might experience months with dividend payouts above the S$20 minimum and below or none on other months.

With the dividends this portfolio generates, you can opt to reinvest the dividends or have the payouts sent to your bank account or SRS account. 

#6: Monthly payouts from annuity plans

Besides building your own passive income portfolio, if you’re looking for monthly payouts during your retirement, you can consider purchasing an annuity plan. 

Annuity plans are retirement plans which you can purchase from insurance companies in Singapore. 

When you purchase an annuity plan, you can opt to pay a single premium, or regular premiums, for a fixed period during your working years. Upon reaching the retirement age, this plan will give you monthly payouts for the number of years stated in the plan, or for your lifetime, depending on the policy you purchased. 

Sounds familiar? This is what CPF LIFE (our national retirement annuity scheme) offers and annuity plans can be the additional layer on top of what we receive from our CPF LIFE. Check out some of the best annuity plans in Singapore here. 

How much passive income do you need?

How much money do you need to get by each month? That’s the amount that you’ll require in passive income, in order to enjoy financial independence and retire early. 

According to this article by SCMP, you'll need US$3.23 million (S$4.3 million) in order to achieve financial freedom in Singapore.

This amount in passive income would differ from person to person, as it depends on your lifestyle and your idea of a dream retirement.

For example, someone who plans to travel overseas frequently would require more money for those expenses. You would also need to factor in the financial obligations you have to fulfil, such as your child’s education and paying off your mortgage.  

However, your monthly passive income doesn’t need to be a huge amount if you plan to lead a simple and frugal lifestyle. 

Once you’ve figured out how much passive income you require, you can then work backwards to calculate how much you need in investments (or the amount of rental you need to generate) in order to get there. 

For example, if you need S$4,000 a month (S$48,000 a year), investing in a stock that gives S$0.50 per share in dividends annually would require you to be holding 96,000 shares. If the share price is trading at S$10, that is equivalent to having S$960,000 invested in that company. 

If you know you’ll drag your feet while figuring out your next course of action, one way to make your money work in the meantime is to invest with a robo-advisor.

This will help you grow your money while you take the necessary steps to build your passive income stream.