Chatter about a market wobble is growing louder amid a spike in geopolitical tensions. Of course, no one can predict what might cause a crash (if they could, it would take away the surprise). Therefore, the next best thing is to have a clear game plan for when (or if) a crash does happen. When it comes to passive income, here’s an approach investors can consider.
Enhanced yield potential
For all of the carnage that a stock market crash causes, there are actually some positives to take from it. One relates to the rise in dividend yields. If we break it down, the dividend yield is made up of the share price and the dividend per share. Logically, if the share price falls but the dividend stays the same, the yield will increase.
Let’s say a stock is trading at 100p with a 5p dividend. The yield is 5%. If a crash causes the stock to fall to 75p, but the dividend stays the same, the yield is now 6.66%. In terms of the change, it’s a 33% boost!
This means that shrewd income investors can pick up dividend stocks that fall during a crash and benefit from this added yield. Of course, if the dividend gets cut in the future due to the company being negatively impacted by whatever caused the crash, that’s a problem. But during a market rout, some stocks fall simply because investors panic. Some firms are unaffected by the cause of the fall but still experience a short-term drop. Those are the stocks to target.
Over the medium term, we could see share prices recover, with dividends remaining unchanged. Of course, there’s no guarantee this will happen, and it ‘ a risk that needs to be acknowledged.
One for the watchlist
If we did see a crash trigger a move lower in most stocks, one that investors could consider is Paragon Banking Group (LSE:PAG). Over the past year, the share price is up 18%, with a current dividend yield of 4.88%.
At a fundamental level, Paragon has been increasing earnings per share and underlying profit, which in turn supports dividend hikes. In its latest fiscal year to September 2025, earnings per share rose by 8.5%, while the dividend increased by 8.7%. As a result, it leads me to conclude the divdiend is sustainable as it’s growing in line with profits.
Although the specialist lender has flagged that recent customer activity has reflected broader uncertainty, I think this will ease in 2026. The latest government Budget hasn’t been as negative as some thought it would be for some of Paragon’s key client groups, such as landlords. If interest rates fall further this year, it could help to kickstart more demand for loans from both landlords and more commercial clients.
In terms of risks, the ongoing FCA investigation into the sector-wide car financing scandal could hurt Paragon. It recently increased the provision set aside for claims to £25.5m. But this could rise in the future depending on what gets decided.
Even with this, I think if a market crash happened surrounding something that didn’t materially impact Paragon, any sell-off could make it an income stock to consider for investors.
