Why I’d look for passive income opportunities before the stock market recovers

Lower share prices mean higher dividend yields. Stephen Wright has a plan for earning passive income from stocks while also managing his risk.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Man putting his card into an ATM machine while his son sits in a stroller beside him.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Key Points

  • Lower share prices mean there are higher dividend yields on offer for investors buying shares
  • Investing in shares is risky, but sticking to some basic principles can help investors avoid some of the danger
  • Banking shares have fallen sharply, making them more attractive passive income opportunities

Falling share prices mean higher dividend yields. And in a lot of cases, that’s a good thing for investors looking for passive income.

The recent correction has emphasised the risks of investing in stocks and shares. But if investors stick to a few basic principles, I think that there are some great returns on offer.

Dividend yields

A combination of rising interest and a crisis in the banking sector have caused shares prices to fall significantly over the last month. Both the FTSE 100 and the FTSE 250 are down around 7%.

That means that there are better returns on offer for investors seeking passive income. Some of the best examples of this are in the real estate sector.

Segro for example, is one of the worst-performing stocks in the FTSE 100 over the last year. The company’s share price has fallen by around 38% in the last 12 months.

Despite this, the company is still making money and its dividend is growing. As a result, the stock has gone from having a dividend yield of 1.8% a year ago to just under 4% today.

For an investor seeking passive income, the stock is a much more attractive proposition today than it was a year ago. But it’s not just Segro in this position – shares have been falling across the board.

Risks and rewards

There’s always an inherent risk when it comes to investing in stocks and shares. But sticking to a few basic principles can give investors a better chance of avoiding serious losses.

As an investor, the main thing I need to avoid is being forced to sell my stocks when they’re down. If I can hold shares through downturns and let them recover, I’m unlikely to lose money over time.

The way for me to avoid this is by making sure I have enough money to hand to deal with any cash requirements I might have. This includes emergencies as well as day-to-day expenses.

Only investing in businesses I can understand is also important. That means being clear on how they make their money, what their future prospects may be, and what sets them apart from the competition.

This helps protect against the threat of a business running into trouble in the future. If I only invest in companies where I can see that this is unlikely to happen, then there’s less risk of losing money.

Eliminating risk entirely in the stock market is impossible. But investors can reduce the danger by maintaining a long-term focus and sticking to stocks they can understand.

Stocks to buy

With all of this in mind, there are a few stocks on my buy list at the moment. I think that bank shares in particular are undervalued at the moment. 

The big risk with bank shares is the kind of liquidity crisis that has done for a couple of banks in the US. But I think this is unlikely and that there’s a good opportunity here at the moment. 

Share prices in the banking sector have been falling and dividend yields have been rising. I think this is a great opportunity for investors looking for really great passive income opportunities.

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.

Stephen Wright 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.

More on Dividend Shares

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »

Investing Articles

Is Tesco’s share price still a bargain after rising 26% over a year?

Recent results show Tesco is still growing its leading market share, and despite its share price gains this year, it…

Read more »

Investing Articles

Here’s what the National Grid share price fall could mean for passive income investors

It's long been seen as one of the FTSE 100's best stocks for durable dividends. What does the recent National…

Read more »

Female florist with Down's syndrome working in small business
Investing Articles

£6,000 in savings? Here’s how I’d try to turn that into a £500 monthly passive income

With careful planning and patience, it’s not hard to earn a passive income with UK shares. Here’s one way to…

Read more »