My 6-step guide to making passive income during a bear market

Jon Smith explains his plan for making passive income from dividend stocks even if the UK market nosedives in the coming year.

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A bear market is a period when the stock market experiences a large fall. It usually ties into a recession. Given that economic forecasts point to a UK recession at the end of this year, I think it’s wise to start planning for what I should do if we also get a bear market. When it comes to making passive income from dividend shares, here’s my current plan.

Preparation with figures is key

To begin with, I want to be smart on my cash flow projections. The economic backdrop over the next year could put pressure on my finances. I don’t want to assume that I’ll be able to set aside a ludicrously ambitious amount of money to invest in dividend stocks. I’d prefer to underestimate the figure now, and then be pleasantly surprised if I can increase this over time.

The step following this is to also have a realistic target amount of income in mind. If I want to make £1,000 a year from dividends in 2023, this might be a stretch in such a short period. Tempering my expectations of how much I can hope to make will also allow me to avoid disappointment further down the line.

The last step on this topic is deciding if I want to take the dividend income and spend it as it comes or reinvest it. I like the latter, as putting my money back into stocks allows my future dividends to be larger. If I really need the income at some point, I can always sell some stocks to realise cash at that point in time.

Focusing on passive income stocks

My next three steps relate to the actual implementation of my plan. Having decided on how much I can invest, how much I want to make and my reinvestment goal, I can actually buy the stocks!

I work backwards in this respect. For example, let’s say I want to try and build up to make £100 a month in income in five years’ time. If I can afford to invest £300 each month, then by my calculations I’ll need to get an average dividend yield of 6% to make this a reality.

From here, I can filter for FTSE 100 and FTSE 250 stocks that fit the bill. Ideally, I want to have a selection of stocks within my income portfolio. This helps to reduce the risk of my goal being ruined by one firm cutting a dividend. It also makes it easier to meet my average yield target. I can buy one stock with a high yield of 8% and one with 4% and still net out at 6%.

The final step is to monitor the progress after I’ve made my first investment. Over time, I might find that I need to adjust what I’m investing in or target a new sector that has become ripe for dividend hunters. I might even need to compensate for problems along the way. This includes a lack of money to invest or a reduction in my projected dividend income.

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 assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has 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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