Even after the stock market rally in the new bull market, many FTSE 350 shares offer high dividend yields. As such, they could prove to be a sound means of generating a passive income compared to other assets such as bonds.
Furthermore, buying defensive companies with robust business models could be a means of enhancing the stability of an income stream. Meanwhile, companies that don’t need to change their business models over the coming years could have greater scope to make rising shareholder payouts.
As such, buying defensive stocks with stable business models could be a means of maximising income over the long run.
Making a passive income from defensive shares
Defensive stocks haven’t been especially popular over recent months. Many investors have instead purchased companies with upbeat growth prospects to make a passive income, or to obtain capital appreciation.
As such, the yields available from defensive shares could be relatively high at the present time. Sectors such as tobacco and utilities currently contain many stocks with above-average yields. These may be less susceptible to declines in a tough economic environment.
In fact, defensive shares could prove to be a means of obtaining a resilient and growing income return. Their financial performance may be less impacted by what could prove to be an uncertain period for the broader economy. This could also lead to dividend growth. Especially since they may be able to raise prices and shareholder payouts in line with inflation.
Buying stocks with stable business models
The pandemic could cause some companies to change their business models in response to evolving customer tastes. For example, they may need to shift resources online. Or they may cater to consumers likely to work from home to an increasing extent in future.
Such companies may be more likely to reinvest in their operations, rather than pay a rising dividend. As such, it may be prudent to seek a passive income from businesses less likely to need to change their operating structure over the next few years.
Such companies may include consumer goods businesses with established brands, or financial services firms that are likely to maintain their current spread of operations.
Although no business model is ever 100% stable and is always subject to change, companies that require modest reinvestment may be a more prudent opportunity to make a growing income return.
Managing risks in an uncertain market
As ever, making a passive income from shares is riskier than holding other assets such as cash and bonds. However, the high yields available in some sectors could make the potential rewards equally high.
Though buying defensive stocks with stable business models doesn’t eliminate risk, it could produce a more robust income return. Certainly in what’s currently a tough operating environment for many FTSE 350 companies.
