The market crash may have dissuaded some investors from buying shares when seeking to make a passive income. However, the yields available across the stock market suggest that equities offer a relatively high income return while interest rates are low.
Through buying a diverse range of companies with affordable shareholder payouts, you could build a resilient income stream that improves your financial position in the long run.
Buying shares to make a passive income
Some investors may naturally seek to sell shares and buy less risky assets to make a passive income after the 2020 COVID-19-led market crash. It showed that equity markets can suddenly become extremely volatile, which can lead to some companies being forced to reduce or even cancel their dividends.
However, on a relative basis, shares continue to offer a more generous income return than other mainstream assets. Many companies continue to pay dividends. And, since their share prices have fallen, it is possible to build a worthwhile income portfolio containing high-yielding stocks.
At the same time, assets such as cash and bonds now offer limited passive income opportunities due to a loose monetary policy being followed by policymakers. Meanwhile, high house prices may mean that yields are relatively low for property investors at the present time. Therefore, focusing your capital on shares could be a sound means of obtaining a generous income return at the present time.
Of course, it is important to only buy those shares that have affordable dividends when seeking to make a passive income. This may mean that their current dividend is affordable, in terms of being covered by net profit. It may also mean that they have defensive business models that are not negatively impacted by an uncertain economic outlook to the same extent as some of their cyclical peers.
Companies that have affordable dividends may also be able to raise shareholder payouts at a faster pace in the coming years. Although inflation may not currently be viewed as a major threat facing investors, the scale of monetary policy stimulus in many major economies could mean that obtaining positive real-terms dividend growth becomes increasingly important in the coming years.
Reducing risk through diversification
Even if a company’s dividend is affordable, it is a sound idea to diversify across sectors and regions when making a passive income from equities. Any industry or region can experience a difficult period that affects even the very best companies that operate in that area. Therefore, it is sensible to own a variety of businesses in your portfolio. This will help to reduce overall risk and could mean that you enjoy a more resilient income return in the coming years.
With the cost of buying shares now being relatively low as online sharedealing has increased in popularity, diversifying is an affordable strategy for almost all investors. It could help you to overcome future threats and enjoy a rising income in the coming years.
Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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