Making a passive income has become increasingly difficult since the start of 2020. Continued low interest rates and challenging trading conditions mean there are fewer opportunities to earn a sound income return than there were even just a handful of months ago.
However, by focusing your capital on companies with defensive characteristics and affordable dividends, you could generate a worthwhile income return over the long run. It could improve your financial prospects and enable you to enjoy a greater degree of financial freedom.
Passive income prospects
With interest rates likely to remain at low levels over the medium term as policymakers seek to support the economy, making a passive income from assets such as cash and bonds may become more difficult. They may be unable to provide a sufficient return on your capital, and may even reduce your spending power if their returns lag inflation.
Therefore, buying dividend stocks could be the most worthwhile means of obtaining an income return over the coming years. Even though stock prices could be volatile over the coming months, weak investor sentiment may mean that the yields on offer across many stock market sectors are highly attractive relative to other income-producing assets. By purchasing a diverse range of high-yielding stocks, you could generate a much higher income return than that available through other mainstream assets.
While some companies have decided to reduce or postpone their dividend payments over recent months, others continue to offer an appealing passive income. They often include businesses with defensive characteristics, whereby their business models are less correlated with the wider economy’s performance than many of their index peers.
For example, companies operating in the utility and consumer goods sectors may be less impacted by coronavirus than businesses in the retail and travel & leisure industries. As such, buying companies with business models that are less likely to be impacted by a slowdown in global GDP growth could be a means of obtaining a solid income return after the recent market crash.
Buying stocks that have affordable dividends could be another means of obtaining a solid passive income at the present time.
Many businesses are likely to experience slowing demand for their goods or services as factors such as rising unemployment and weak consumer confidence take hold in many of the world’s major economies. If they have dividends that were previously very affordable, in terms of being easily covered by net profit over the past few years, they may be less likely to cut shareholder payouts in response to a period of weaker profitability.
Therefore, by assessing the affordability of a company’s dividend, you could build a more robust income stream in what may prove to be a challenging period for income-seeking investors.
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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.