Pension 101: how to generate a sustainable passive income in a volatile stock market

Here’s how you could limit your risks to obtain a resilient income stream from dividend stocks.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The stock market’s inherent volatility can make it difficult for an investor to obtain a robust passive income from equities. After all, the track record of indexes such as the S&P 500 and FTSE 100 shows that bear markets have been commonplace throughout their history.

While it is not possible to eliminate risk completely when buying stocks, investors who focus on companies that have defensive characteristics and solid track records of paying dividends may find that their income prospects are more reliable.

Furthermore, through diversifying across a range of industries and geographies, dividends could be more sustainable over the long run. This may lead to a more robust passive income for investors.

Defensive characteristics

Companies that exhibit defensive characteristics could offer relatively solid dividend outlooks. In many cases, they may be mature businesses that have been in existence for a long time period. This could afford them with strong cash flow that can be paid to shareholders as a dividend, rather than being reinvested to generate improving returns. The end result could be that the company in question has a dividend that is resilient and can rise over the long run.

In addition, defensive stocks usually operate in industries that are less dependent on the wider economy when it comes to their financial performance. For example, healthcare stocks, tobacco businesses and utilities may be less impacted by economic change than cyclical industries such as travel, retail and banking. As such, focusing your capital on industries with a greater independence from economic events could produce a more sustainable income stream.

Diversity

Of course, a key means of reducing portfolio risk is to diversify. This reduces the impact of one company’s financial performance on your wider portfolio. Diversification is easier to achieve than ever, with the cost of sharedealing having fallen in recent years. As a result, it is relatively cheap for any investor to build a portfolio of companies that provide exposure to a range of geographies and industries.

Furthermore, with the world economy experiencing significant change at the present time, hedging your bets could be a sound idea. It is difficult to predict which regions of the world will deliver on their forecasts, and also which industries will become obsolete in the coming years. By having a mix of appealing dividend stocks, it may be possible to lessen this risk.

Track records

Although past performance is not a perfect guide to the future, companies that have a solid track record of dividend growth may be more likely to maintain this performance in the long run. Therefore, studying a company’s past dividend payments, and how they have grown over the years, may increase the resilience of your passive income.

Clearly, stocks will always be riskier than other assets such as cash and bonds. But the returns they offer could make them a worthwhile means of generating a passive income in the long run.

More on Retirement Articles

A senior man and his wife holding hands walking up a hill on a footpath looking away from the camera at the view. The fishing village of Polperro is behind them.
Investing Articles

Not using a Stocks and Shares ISA? You could be missing out on a wealthy retirement!

With significantly higher returns than the Cash ISA, Royston Wild explains how a Stocks and Shares ISA can supercharge your…

Read more »

Senior couple are walking their dog through a public park in Autumn.
Investing Articles

If a 30-year-old puts £500 a month in a SIPP, by retirement, they’d have…

Worried about not having enough money to retire on? Regularly investing in a Self-Invested Personal Pension (SIPP) may be worth…

Read more »

Senior woman potting plant in garden at home
Investing Articles

Could a 10%+ yielding dividend share like this make sense for a retirement portfolio?

With a double-digit percentage yield, could this FTSE 250 share be worth considering for a retirement portfolio? Our writer weighs…

Read more »

Mature people enjoying time together during road trip
Investing Articles

Keen for early retirement with a second income from dividends? Here’s how much you might need to invest

Ditching the office job early is a dream of many, but without a second income, is it possible? Here’s how…

Read more »

A mature adult sitting by a fireplace in a living room at home. She is wearing a yellow cardigan and spectacles.
Investing Articles

5,223 shares of this high-yield dividend star pay an income equal to the State Pension

Zaven Boyrazian explores a leading dividend stock in the FTSE 100 and calculates how many shares investors have to buy…

Read more »

Friends at the bay near the village of Diabaig on the side of Loch Torridon in Wester Ross, Scotland. They are taking a break from their bike ride to relax and chat. They are laughing together.
Investing Articles

I asked ChatGPT for 5 world-class UK stocks for a retirement portfolio. Here’s what it gave me

Searching for top-quality UK stocks for a retirement portfolio? Here are some names that the world's most popular generative AI…

Read more »

Friends at the bay near the village of Diabaig on the side of Loch Torridon in Wester Ross, Scotland. They are taking a break from their bike ride to relax and chat. They are laughing together.
Investing Articles

How much do you need in an ISA to earn a £33,333 passive income?

Discover how to target a five-figure passive income in a Stocks and Shares ISA -- and a top 7.6%-yielding dividend…

Read more »

Content white businesswoman being congratulated by colleagues at her retirement party
Investing Articles

Don’t ‘save’ for retirement! Invest in dirt cheap UK shares to aim for a better lifestyle

Investing in high-quality and undervalued UK shares could deliver far better results when building wealth for retirement. Here's how.

Read more »