Buying dividend shares to make a passive income may seem to be a risky move after the stock market’s recent crash. However, a lack of appeal from other income-producing assets such as cash and bonds may mean that dividend shares offer an impressive long-term outlook.
Furthermore, with many income stocks offering dividend growth potential as the world economy recovers, they could produce attractive total returns when purchased as part of a diverse portfolio of equities.
The uncertain outlook for the world economy may mean that the yields available on dividend shares are relatively attractive. Low interest rates could be set to remain in place over the coming years as policymakers seek to offer support to the economy. The result may prove to be low income returns from assets that would normally form part of an income investor’s portfolio, such as cash and bonds.
In fact, the returns from cash and bonds could prove to be lower than inflation in some cases. This may reduce your spending power and make the task of generating a passive income more challenging over the long run.
Dividend growth potential
As well as offering a higher income return in the current year than cash and bonds, dividend shares may offer a growing revenue stream over the long run.
Certainly, many industries face an uncertain period at the present time. Factors such as rising unemployment and weak consumer confidence across many of the world’s major economies may cause challenging trading conditions that result in lower dividends than would normally be the case.
However, over the long run, the track record of the world economy shows that it has been successful in overcoming its difficult periods to post positive growth. Therefore, the chances of dividend growth returning over the coming years appears to be high – even in industries that are currently facing weak operating conditions due to the coronavirus pandemic.
Dividend growth could further enhance your passive income in the long run. It may also make the difference in returns between dividend shares and other income-producing assets much wider, since low interest rates may remain in place over the next few years to stimulate the economy.
A diverse portfolio of dividend shares
Buying a range of dividend shares could be a means of reducing your risks and producing a more reliable passive income. Having exposure to different economies and a range of sectors can lower your reliance on a small number of companies from which to generate a regular passive income.
With the cost of buying shares now lower than it ever has been, it could be a good time to spread your capital across a variety of dividend shares. It could lead to high income returns, as well as dividend growth as the world economy gradually recovers.
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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