3 ways I can make passive income in a falling stock market

Jon Smith writes about several methods he’s going to implement to boost his passive income potential if the market falls.

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Some people associate chunky dividends and fat profits from a stock market boom. It’s certainly easier to make money when the market is soaring. But even if the FTSE 100 and other indices are falling, I can still make passive income from dividend shares. Here are three ways that I’m noting down that could be very handy in the near future.

Taking advantage of higher yields

The main way a falling stock market can help me receive income is due to the higher dividend yields. The dividend yield is a simple but effective way of calculating how much I’m getting paid relative to the current share price. Ideally, I want to receive a high dividend per share, but pay a low price for the stock in the first place. This means my cash is working hard.

The dividend yield calculation is actually very simple. I divide the dividend per share by the current share price. For example, if the dividend per share is 10p and the share price is 100p, the yield is 10%.

During a time when the market is dropping, most share prices will also fall. If I assume that the dividend per share has stayed the same, then the dividend yield will increase. This helps me to generate higher levels of income than before, thanks to the lower prices.

Reinvesting for higher passive income

I can also boost my dividend income by reinvesting my money. Let’s say I invest £500 in a stock that currently yields 10% and pays a dividend twice a year. Depending on the exact date I purchase the stock, my first £25 would be due in a few months time.

When I receive the £25, I can choose to spend it or reinvest it. If the share price has fallen since I first bought, the dividend yield will have increased further. So I can take the £25 and buy more shares in that business. Instead of receiving a yield of 5% on this amount, I’m going to get an even higher yield.

Depending on how long the falling market lasts for, I can take advantage of boosting my dividend yield over time.

Buying now for income in the future

The final method I’m going to put into action when relevant is buying stocks that don’t pay a dividend now, but could in the future.

For example, the International Consolidated Airlines Group had a history of paying a dividend for several years before the pandemic hit. The dividend was cut to zero and the share price has fallen. If the share price continues to fall, it’ll reach a point when I think I’ll buy. This is not only a value play, but also a future dividend one.

If the company benefits in years to come from a broader stock market rally, it could reinstate the dividend. Given that I’ll own shares from a much lower (cheaper) level, the dividend yield will be much higher for me than it would be if I bought after the rally.

As a note, dividend income is not guaranteed. This is the main risk when considering options for passive income. It is hard to predict and forecast future earnings and yields and so I should be careful when making assumptions in this regard.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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