When people talk of a once-in-a-decade or once-in-a-lifetime opportunity, I’m quick to find out more. It can be hard to back up those claims, but there are good examples of an idea or reasoning that completely makes sense. When it comes to making passive income from dividend stocks, here’s why I think now is a unique time to be buying.
Two areas of underperformance
Despite the FTSE 100 rallying hard over the past couple of months, there are several sectors that have really underperformed. Concerns around the UK economy have pushed areas such as property and financial services down as investors move to what they deem to be safer defensive stocks.
However, it just so happens that property and financial services are two areas that historically have been good dividend payers. For example, the dividend yield for asset manager abrdn hasn’t dropped below 3.25% over the past decade.
I accept that homebuilders do go through some periods of pausing their dividend payments, such as in 2020 with the pandemic. But on the whole, I find that area very lucrative for income because of the generous profit margins and levels of cash flow generation.
How this filters down to passive income
Due to the share price performance over the past year of stocks in this area, the dividend yields have increased significantly. For example, Taylor Wimpey has so far kept its dividend per share payments stable, yet the dividend yield has jumped from 5.5% a year ago to 8.01% now. This rise is due to the 30% fall in the share price over the past year.
I feel that now is a once-in-a-decade opportunity to take advantage of the high dividend yields from these sectors. We’re in the stage of the economic cycle where these areas are being overlooked by investors. Yet when the recovery and boom period of the next bull market cycle kicks in, I’d expect these shares to increase in value.
If I assume the dividend remains the same over the next decade but the share price rises, then the dividend yield will fall. Given that an economic cycle can take a decade, now could be the best time to buy to enjoy the high-income potential.
Caution warranted
The main risk to my view is that we aren’t at rock bottom for the UK economy. For example, asset mangers could see continued outflows from customers. This could push the share price down even further. Or the performance of these stocks could mean that the dividends are temporarily cut.
Ultimately, this risk is why I’d build an income portfolio including several property and finance related stocks. Not only that, but I’d also include other income stocks that are less cyclical in nature.
Only time will tell if these attractive yields are the best we’ll see in a decade. But I’m going to start investing in small chunks to ensure I don’t miss the boat!
