Making a passive income isn’t hard. Here are the 3 things you need to do
The stock market’s recent crash may dissuade investors from buying dividend stocks to make a passive income. After all, the world economy is facing a highly uncertain period which could mean that companies fail to grow their dividends at a fast pace over the coming months.
However, by purchasing a wide range of high-quality businesses you can obtain a generous passive income which may be more robust than it first appears. And, by having some cash available in case of unexpected costs, you can take advantage of high yields and low valuations across the stock market today.
The current challenges facing a wide range of sectors such as airlines, retail and consumer goods highlights the importance of diversifying across different stocks. For example, an investor who focuses their capital on one sector may find that their passive income is negatively impacted by a specific event to a greater degree than an investor who holds a diverse range of businesses in their portfolio.
Diversifying means that you are less reliant on a specific company or sector for your dividend income. The falling cost of buying stocks means that building a larger portfolio of diverse businesses is more accessible than ever for a wider range of investors. As such, now could be the right time to buy companies operating in different regions and sectors to not only boost your income, but to reduce your portfolio’s overall risk.
While the past performance of companies is not always mirrored in their future prospects, the cyclicality of the economy means that some stocks may be better placed to cope with difficult periods. For example, healthcare and utility companies generally fare better than airlines and retailers during recessions. They may be able to provide a more robust passive income which is desirable for investors who rely on their dividends to fund their lifestyles.
Therefore, identifying how much risk you are able and willing to take in terms of the reliability of your income is a sound move. Through buying stocks that have a long track record of dividend growth throughout various financial crises, you can build a more robust passive income that is less impacted by economic uncertainty.
It is tempting to invest all of your spare capital in dividend stocks to maximise your passive income. However, holding some cash in a savings account is always a shrewd move. Unexpected bills can come along at any time, and often appear at the most inconvenient times. Therefore, having cash available to pay for costs such as housing or car repairs may provide peace of mind in terms of enjoying a growing passive income.
Of course, low interest rates mean that relying on cash for your passive income is unlikely to be a profitable move. As such, focusing the vast majority of your portfolio on stocks while they offer high yields could enable you to build a growing passive income stream.
The post Making a passive income isn’t hard. Here are the 3 things you need to do appeared first on The Motley Fool UK.
Motley Fool UK 2020