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Why I’d look for passive income opportunities before the stock market recovers

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Falling share prices mean higher dividend yields. And in a lot of cases, that’s a good thing for investors looking for passive income.

The recent correction has emphasised the risks of investing in stocks and shares. But if investors stick to a few basic principles, I think that there are some great returns on offer.

Dividend yields

A combination of rising interest and a crisis in the banking sector have caused shares prices to fall significantly over the last month. Both the FTSE 100 and the FTSE 250 are down around 7%.

That means that there are better returns on offer for investors seeking passive income. Some of the best examples of this are in the real estate sector.

Segro for example, is one of the worst-performing stocks in the FTSE 100 over the last year. The company’s share price has fallen by around 38% in the last 12 months.

Despite this, the company is still making money and its dividend is growing. As a result, the stock has gone from having a dividend yield of 1.8% a year ago to just under 4% today.

For an investor seeking passive income, the stock is a much more attractive proposition today than it was a year ago. But it’s not just Segro in this position – shares have been falling across the board.

Risks and rewards

There’s always an inherent risk when it comes to investing in stocks and shares. But sticking to a few basic principles can give investors a better chance of avoiding serious losses.

As an investor, the main thing I need to avoid is being forced to sell my stocks when they’re down. If I can hold shares through downturns and let them recover, I’m unlikely to lose money over time.

The way for me to avoid this is by making sure I have enough money to hand to deal with any cash requirements I might have. This includes emergencies as well as day-to-day expenses.

Only investing in businesses I can understand is also important. That means being clear on how they make their money, what their future prospects may be, and what sets them apart from the competition.

This helps protect against the threat of a business running into trouble in the future. If I only invest in companies where I can see that this is unlikely to happen, then there’s less risk of losing money.

Eliminating risk entirely in the stock market is impossible. But investors can reduce the danger by maintaining a long-term focus and sticking to stocks they can understand.

Stocks to buy

With all of this in mind, there are a few stocks on my buy list at the moment. I think that bank shares in particular are undervalued at the moment.

The big risk with bank shares is the kind of liquidity crisis that has done for a couple of banks in the US. But I think this is unlikely and that there’s a good opportunity here at the moment.

Share prices in the banking sector have been falling and dividend yields have been rising. I think this is a great opportunity for investors looking for really great passive income opportunities.

The post Why I’d look for passive income opportunities before the stock market recovers appeared first on The Motley Fool UK.

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Stephen Wright has no position in any of the shares mentioned. 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.

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