The stock market crash has left many UK shares offering attractive passive income prospects. Lower share prices and maintained dividend payouts mean that yields across the FTSE 100 and FTSE 250 are exceptionally high in some cases.
Of course, a weak economic outlook means that ensuring a company’s dividend is affordable may be a worthwhile move prior to purchase. Similarly, assessing its dividend growth prospects could lead to an improving income outlook, as well as capital returns as the stock market experiences a likely recovery.
Assessing the affordability of dividends among UK shares
The stock market crash has highlighted the volatility that can be present among UK shares. A weak economic outlook may also put pressure on dividend payouts for those companies that are struggling to generate sales and profit growth. As such, assessing the affordability of a generous dividend yield could be crucial in obtaining a resilient passive income.
A simple means of doing so is to compare net profit with dividends paid. This highlights the headroom a company has when making shareholder payouts. If it’s relatively large, the company in question may be able to sustain dividends through a temporary period of financial difficulty. However, a business with little or no headroom when making shareholder payouts may be more likely to cut them in response to the uncertain economic outlook.
Contemplating dividend growth after the stock market crash
Clearly, the stock market crash means it may be more difficult to assess which UK shares can offer dividend growth. However, analysing a company’s track record of dividend growth in a variety of market conditions could act as a guide to how it will perform in the coming years. Similarly, a company that pays out a small portion of profit to shareholders may be able to raise dividends even if its profitability fails to dramatically improve.
Investing money in UK shares with dividend growth potential may also lead to impressive capital returns. They may not only benefit from a likely stock market recovery after the market crash, but could also become more popular from a passive income perspective. Other assets, such as cash and bonds, offer relatively low returns that may fail to rise over the long run due to a persistently loose monetary policy. This may increase demand for FTSE 100 and FTSE 250 dividend shares that pushes their prices higher.
Reducing risks when making a passive income
Investing money in UK shares could realistically produce a 5%+ passive income at the present time. However, it’s important to diversify across a wide range of British shares to reduce risk. Doing so could provide a more resilient income return over the coming years. Picking shares that deliver growth and capital return prospects will benefit as the stock market recovers from the 2020 crash.
The post Stock market crash: how I’d invest money in UK shares today for a passive income appeared first on The Motley Fool UK.