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, an investor like me could build a resilient income stream. And that could improve their 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 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. This is 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 moment. Therefore, focusing on shares could be a sound means of obtaining a generous income return at the present time.
Dividend affordability
Of course, it is important to only buy those shares that have affordable dividends when seeking to make a passive income. This means the dividend being covered by net profit. It may also mean that they have defensive business models. Such models 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. Investors may not view inflation as a major threat for now. But the scale of monetary policy stimulus in many major economies could mean that obtaining positive real-terms dividend growth becomes increasingly important in the future.
Reducing risk through diversification
A company’s dividend may be affordable. But it is a good idea to diversify across sectors and regions when making a passive income from equities. Any industry or region can experience a difficult period. And such periods can affect even the very best companies in specific sectors. Therefore, it is sensible to own a variety of businesses within a portfolio. This will help to reduce overall risk. And it could mean that an investor enjoys a more resilient income return in the coming years.
The cost of buying shares now is relatively low as online share-dealing has increased in popularity. So diversifying is an affordable strategy for almost all investors. It could help an investor to overcome future threats and enjoy a rising income in the coming years.
