The Motley Fool

Retirees: 1 trick to max out your passive income with dividend stocks

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.

Image source: Getty Images

The stock market’s recent challenges mean that a number of stocks have relatively high dividend yields at the present time. As such, many investors may be seeking to improve their passive income through purchasing high-yielding stocks.

While this can be a sound strategy, considering a company’s dividend prospects over the long run could be a better idea. A high yield today may not translate into a growing and sustainable passive income in the coming years.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

As such, focusing on dividend prospects, rather than solely on dividend yield, could be a shrewd move – especially after the market crash.

Dividend prospects

The dividend prospects for any business can be measured by their affordability, as well as by their potential to rise over the long term. In terms of affordability, there is little point in buying a stock with a high yield when its dividend payments are unlikely to be met over the medium term.

Therefore, assessing a stock’s headroom when making its shareholder payouts is a worthwhile move. This can be achieved by dividing net profit by dividends paid to determine how many times a company is able to make its shareholder payout. A figure of less than one suggests that dividends could be reduced in the near term.

As well as checking the affordability of a company’s dividends, it makes sense to consider their growth potential. This is arguably more subjective than considering dividend affordability, since it hinges to a large extent on the future profitability of the company in question. However, by considering its operating environment, past dividend growth, and the attitude of its management team towards reinvesting profits, it is possible to ascertain the likelihood for dividends to rise at a fast pace over the long term.

Buying opportunities

Clearly, at the present time the prospects for dividend stocks are relatively challenging. Investors may become cautious about the affordability and growth prospects of dividends across a range of companies.

However, history shows that while economic challenges can be painful in the short run, the global economy has always recovered from recessions to return to growth. Therefore, today could be a good buying opportunity while many stocks have high yields and low valuations. They may still be able to post resilient shareholder payouts and raise them at an above-inflation pace over the coming years.

Relative appeal

Certainly, there may be less risky means of generating a passive income at the present time. You are less likely, for example, to lose money on cash or bonds. But those assets also fail to have the passive income potential of stocks, and would require a larger amount of capital to produce a similar income level due to their lower returns.

As such, now could be the right time to buy dividend shares to enjoy a relatively high passive income. By assessing their dividend prospects, in terms of affordability and growth potential, you can enjoy a higher income return.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.