Making a passive income from UK shares has been a tough task in 2020. Many FTSE 100 and FTSE 250 shares have cut or postponed their dividends. As such, there is a narrower pool of potential investments offering an income return.
However, a number of shares continue to pay dividends. In some cases, they offer high yields and dividend growth potential over the long run. As such, investing in them now could prove to be a shrewd move ahead of a likely stock market recovery.
Making a passive income with high-yielding UK shares
Despite the recent stock market rally, a number of UK shares offer generous yields through which to make a passive income. On a relative basis, they are likely to be hugely attractive. Low interest rates mean that assets such as cash and bonds offer extremely low income returns. Meanwhile, rising UK house prices mean that buy-to-let investments may offer disappointing yields.
As such, the yields on offer from UK shares such as British American Tobacco and Vodafone could be very attractive at the present time. They both yield in excess of 6%, and have maintained their shareholder payouts throughout the current economic crisis. Looking ahead, they and other high-yielding FTSE 100 stocks look set to produce impressive income returns as the stock market recovers.
Obtaining a high dividend growth rate in a stock market recovery
The stock market recovery provides investors in UK shares with an opportunity to make a growing passive income. Investor sentiment could improve further in the coming months as a likely reduction in coronavirus case numbers and lessening political uncertainty combine to create more prosperous operating conditions for many sectors.
The end result of this could be stronger financial performances that lead to rising dividends. Even though inflation currently stands at just 0.3%, companies that can grow dividends at a fast pace could become increasingly in demand. The scale of monetary policy stimulus already enacted by the Bank of England means that a higher inflation rate seems likely over the long run. Therefore, companies such as AstraZeneca and Barratt could become increasingly attractive to income investors due to their forecast improvements in profitability over the coming years.
Taking a long-term view
Of course, passive income investors face risks in 2021 that could disrupt their financial prospects. Even though coronavirus and Brexit may fade over the long run in terms of their impact on company performances, they are likely to remain in play in the short run.
Therefore, it is crucial to diversify among a wide range of businesses to create a more stable and resilient income. Similarly, taking a long-term view of UK shares could be a sound move that enables an investor to maximise their returns in a likely stock market recovery.
The post How I’d start earning passive income from UK shares in the stock market recovery appeared first on The Motley Fool UK.
Peter Stephens owns shares of AstraZeneca, Barratt Developments, British American Tobacco, and Vodafone. 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