Some passive income ideas have become less attractive in 2020. Individuals seeking to achieve financial freedom through owning assets such as bonds and cash may be disappointed. Low interest rates mean that their income returns are relatively poor. Meanwhile, other investments such as buy-to-let offer low yields in many cases due to high house price growth.
However, all is not lost for income investors. Many UK shares offer high dividend yields that could mean they offer good value for money. Their past performance suggests that they are a sound means to build a large nest egg – even with modest sums of money.
Investing in UK dividend shares for a long-term passive income
Investing money in UK dividend shares could be a sound means of obtaining a worthwhile passive income in the long run. They could even be a simple route to achieving financial freedom in the coming years.
If an investor obtains an 8% annual return on a £5 daily investment, their portfolio could be worth £350,000 at the end of a 35-year period. This assumes their portfolio returns match those of the FTSE 100, which has recorded high-single-digit annual total returns over the past few decades. From their £350,000 portfolio, an investor could realistically obtain an income of £14,000 per year if they withdrew 4% on an annual basis.
Buying dividend shares today
However, an investor may be able to generate even higher returns and a more generous passive income through investing money in UK dividend shares today. In many cases, they offer high yields that suggest they offer wide margins of safety after the 2020 stock market crash. With a likely improvement in the economy’s performance ahead, they may be able to deliver rising profitability and growing dividends that make them increasingly attractive to income investors.
Furthermore, the lack of income opportunities available elsewhere could mean that dividend shares naturally become increasingly demanded by investors. This may push their share prices higher, resulting in a larger nest egg and income return for an investor who buys such companies on a regular basis.
Managing expectations after the 2020 stock market rally
Clearly, many passive income investors will look at the recent performance of the FTSE 100 and feel that high returns are a given. After all, the stock market recovery since its March 2020 lows has been extremely strong.
However, the reality is that such returns are rare. The stock market has always experienced ups and downs throughout its history. Therefore, investors may experience a mixed performance from their portfolio in the short run as threats such as Brexit and coronavirus remain in play. As such, it is imperative to take a long-term view to successfully achieve financial freedom.
Similarly, some companies may fail to deliver on their potential. They could even produce a disappointing level of passive income over the long run. This means that it is important to diversify among a wide range of companies. Doing so could lower an investor’s overall risks, and provide a greater chance of achieving financial freedom in the coming years.
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.