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The 2020 stock market crash could mean that some investors are looking outside the dividend rates for passive income. For example, they may decide to buy bonds or hold cash for their lower risks and more stable outcomes.
However, the high yields currently available on the stock market could mean dividend stocks are a more attractive option. They could also offer long-term dividend growth.
Meanwhile, building a diversified portfolio of financially sound companies could mean less risk in an uncertain economic time.
Making passive income with high-yielding dividend stocks
High-yielding dividend stocks could offer much more attractive passive income than other assets. While some stocks have recovered from the 2020 stock market crash, many others continue to trade at low prices. As a result, their returns are above their historical averages.
Conversely, income-producing assets such as cash, bonds and property can offer relatively unattractive income prospects. Low interest rates may remain in place over the medium term as policy makers seek to stimulate the economy. This could mean that cash and bond yields are struggling to beat inflation. Over time, this could lead to a loss of spending power. Meanwhile, high home prices may mean that investing in property produces a relatively low level of income compared to dividend stocks.
Shares with high yield dividends may also offer growing passive income. The world’s current economic problems are unlikely to last in the long term. Positive GDP growth has always followed recessions on a global basis. Therefore, investors could benefit from dividend growth as a result of their holdings generating higher profits as the world economy rebounds.
Reduction of risks deriving from investing in dividends
Obviously, making passive income from dividend stocks is riskier than other traditional assets. Even the best companies can experience disappointing performance periods that disrupt their ability to pay dividends. Therefore, it is a good idea for an investor to try to reduce risks wherever possible.
A simple strategy to achieve this is to build a diversified portfolio of stocks. In doing so, an investor reduces their exposure to a specific business, sector or region. This may mean that their income is more stable and reliable than it would be in a more concentrated portfolio. It can also provide them with greater opportunities to benefit from growth prospects across a wider range of sectors and countries.
In the meantime, selecting the most financially sound companies for passive income can mean further risk reduction. Companies with strong balance sheets, broad economic moats, and solid track records of performance in a range of economic conditions can deliver a more stable income return over the long term. They may also be able to better adapt to changing operating conditions, which could lead to higher dividends in the long run.
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