Sage Investment Club

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The stock market offers plenty of opportunities for investors like me, seeking passive income from high-yield investments.

Let’s explore three different ways I can generate additional income with minimal effort in 2023.

1. Dividend stocks

The first place I’d start in my quest for passive income would be dividend stocks. This is where UK shares come into their own, offering higher dividend yields on average than their US counterparts.

A quick glance at the respective indexes tells me that the yields provided by the FTSE 100 (3.54%) and FTSE 250 (3.07%) comfortably beat the S&P 500 (1.74%) and Nasdaq Composite (1.28%).

In particular, the greater concentration of value stocks in the FTSE 100 compared to the other indexes means London’s blue-chip benchmark is heavily exposed to financials, energy, and materials. At around 40% of the index, this is more than double the S&P 500’s weighting in these sectors.

Many of these companies are defensive, cash-generative businesses that pay big dividends, making them excellent picks for passive income seekers. To highlight some examples, Lloyds Bank offers a 4.33% dividend yield, BP yields 3.9%, and Rio Tinto sports an 8.56% yield.

While I might be sacrificing growth opportunities in other sectors like technology, with passive income on my mind, I think these are the sorts of names I’d like to see in my portfolio.

What’s more, defensive investments often outperform in recessions as investors flee more speculative plays to seek safety in high-quality companies. Amid concerns that both the UK and US could fall into recession this year, I’m looking to buy defensive shares to ride out macroeconomic turbulence.

2. REITs

Another asset class offering passive income is real estate investment trusts (REITs). They provide a handy way to gain real estate exposure without the hassle of being a landlord. It’s definitely a more passive investment than a buy-to-let property.

Typically, a REIT will be listed on a stock exchange and pool together investors’ cash to invest in property, giving shareholders indirect exposure. Often each REIT will focus on a particular type of property.

For instance, Ediston Property Investment Company focuses on retail warehouses and yields 7.91%. On the other hand, Custodian Property Income REIT has a more diversified portfolio covering industrial properties, office blocks, and high street premises. This REIT yields 5.86%.

There are signs commercial property prices are weakening with dealmaking at its lowest level for a decade. This could impact the bumper yields that many UK REITs offer. Nonetheless, they form an important part of my passive income portfolio due to the diversification they offer.

3. Dividend funds

Finally, a simpler solution to boost my passive income is a dividend stocks fund. Although picking individual stocks is the keystone of my investment strategy, I think funds have their place too.

Due to the low ongoing charge fees and simplicity, I think they can be great buy-and-hold investments for the long term.

One high-dividend fund I own is the Vanguard FTSE All-World High Dividend Yield UCITS ETF. Its top three holdings are pharmaceutical company Johnson & Johnson, oil major Exxon Mobil, and financial services giant JPMorgan Chase.

With a 3.73% dividend yield, this ETF offers a way to own some of the world’s highest-yielding companies.

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