How to make reliable passive income with cheap dividend stocks

The 2020 crash means that many investors are looking outside the stock market for passive income. For example, they can buy property or hold bonds instead of buying stocks with low-cost dividends at a time when their future prospects are relatively uncertain.

However, dividend stocks offer strong income prospects thanks in part to their high yields. They also have growth potential that could enable you to achieve robust long-term income when you own a wide range of stocks in a portfolio.

Affordability of dividends for reliable passive income

Perhaps the most important aspect of obtaining reliable passive income is ensuring that a company’s dividends are affordable. There is very little to be gained in buying a stock that has a high yield, but is unable to pay shareholders a share of the profit every year.

A company’s dividend accessibility analysis can be achieved by focusing on its dividend coverage ratio. It is calculated by dividing the net profit by the dividends paid. A figure equal to or greater than one means that the company has leeway when making payments to shareholders. A dividend coverage ratio of less than one means your dividends may be inaccessible unless your net profit increases over the medium term.

Buying companies with more than one dividend coverage may be more important than ever at the moment for investors looking to make robust passive income. The economic outlook is very uncertain. Therefore, seeking a safety margin in assessing a company’s dividend affordability can lead to more reliable income prospects.

Financial solidity and competitive position

Passive income investors may also want to consider a company’s financial strength when assessing its investment potential. Companies with strong balance sheets that contain modest debt may be in a better position to survive weaker operating conditions. They may also be less likely to cut dividends in response to weaker sales prospects, as they have the financial means to get through a tough economic period.

Likewise, companies with a competitive advantage over peers may be able to produce greater long-term profitability. For example, they may have a unique product or a cost advantage over their competitors that results in higher profit growth and a more robust dividend.

Diversification

A diversified equity portfolio can offer relatively resilient passive income. For example, a portfolio of 30 companies operating in different sectors may produce a more stable return on income than a portfolio of fewer than 10 companies all operating in similar sectors.

Diversifying is cheaper and easier than ever. Therefore, any investor looking to earn reliable income from low-cost dividend stocks after the stock market crash can build a portfolio containing a wide range of companies without incurring high commission costs. This could improve your returns and provide greater long-term stability.