There is confusion among investors about what is a suitable investment to live on. When talking about passive income, many investors only consider assets that pay dividends. This is an error that I will explain.
To understand what the definition of passive income is, I will first explain what the opposite is, namely active income.
Active income occurs when you exchange work for money. Thus, your job generates an active income. You work and earn a salary.
Not every dividend can be classified as passive income.
If you are an entrepreneur and you are actively running the business, your company’s dividends are active income. If you leave management, the company may not perform as well and even generate losses.
Passive income occurs when you earn income without doing constant daily work on what generates your income.
Note the term: income. It’s not just dividends. In fact, dividends are one of the possible benefits that one can receive, and that’s not all.
Income from investments is made up of two parts: earnings and capital gain.
In addition to the dividend, among the benefits you can receive are interest on investments.
Thus, what qualifies an investment to be eligible for the position of passive income generator is that it provides positive returns.
When I talk about positive returns, I mention the sum of earnings and capital gain.
It’s no use having positive dividends and a negative capital gain outlook. Therefore, the dividend alone is not enough.
With the high interest rates we are experiencing in Brazil, the best vehicle today to live on passive income is fixed income. The interest received is unbeatable. And the yield is right.
The rise in the Selic rate to 13.75% per year, this past Wednesday, favors this choice even more.
As our Minister Paulo Guedes would say, “we are once again the country of rentiers”, and this occurs in fixed income.
I’m not saying that an investor should only have fixed income in the portfolio, but only that it currently has the best risk-return balance.
Michael Viriato is an investment advisor and founding partner of Investor’s House
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I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
