Earning a passive income is a fantastic way to earn money without much stress or effort. Achieving it can mean financial stability and freedom, allowing you to spend more time doing the things you love. Developing a passive income stream is easier said than done. But I think growing one from stock market dividends is about as straightforward as it gets. Here’s why.
A passive income from UK dividend shares
When it comes to earning an income through investing in the stock market, dividends are the key. These are the distribution of a portion of a company’s profits to shareholders. Some companies pay a much larger dividend than others, and some don’t pay one at all. In fact, it’s not uncommon to find newly established companies that are seeking to expand operations reinvesting the majority of their earnings, rather than paying out a dividend.
For other companies, the dividend payment is perhaps one of the principal reasons why investors buy the shares in the first place. Think about companies such as Shell, BP and British American Tobacco. All three aren’t going to grow exponentially over the coming years, but they each offer a bulky dividend yield that’s attractive to income investors.
However, when investing in dividend stocks, it’s important to consider factors other than the yield. Features that are equally significant include a history of dividend growth and a sustainable payout ratio. A good combination of these factors in a stock will ensure a healthy passive income stream.
Is it possible to live off dividends?
The possibility of living off dividends may seem like a pipe dream given the uncertain economic outlook and stock market volatility. After all, around half of the companies listed in the FTSE 100 have cancelled or cut dividends. Even Shell, the world’s biggest dividend payer in five out of the last seven years, succumbed to the pressure.
Nevertheless, if you have a long-term investment horizon, I don’t think there’s anything to worry about. Many of the companies that have slashed dividends will eventually resume payouts, provided the businesses can recover in line with the economy. As such, setting yourself up today in the best way possible to earn a bumper passive income stream is a wise idea.
It’s important to note that the process of living off dividends is a marathon. Not a sprint. A sizeable passive income stream from your dividends won’t come overnight (unless you have a huge lump sum ready to invest). With that in mind, I recommend targeting dividend growth stocks. These companies increase their dividend annually, which means that your income rises without you having to do a single thing.
Given enough time in the market, earning a tidy income from your investments and using it to live on is entirely feasible. By focusing your efforts on the key characteristics to look out for, it should be straightforward to determine the best UK dividends shares that will fuel your passive income venture.
The post Here’s how I’d earn a passive income from the best UK dividend shares after the stock market crash appeared first on The Motley Fool UK.
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Matthew Dumigan owns shares in Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2020