The stock market crash of recent months is an event that does not take place frequently. The previous decline in stock prices on a similar scale took place during the global financial crisis, which was over a decade ago.
Therefore, it could be a good idea for investors to capitalise on the high yields available across a wide range of sectors to generate a generous passive income. Dividend stocks could produce a total return that is significantly higher than that offered by other mainstream income-producing assets.
A rare opportunity
The stock market’s cyclicality means that it has experienced a number of downturns in the past. However, the scale of the recent market crash is an event that does not take place frequently. Many stocks have declined to price levels last seen during the global financial crisis over a decade ago, with their yields being above their historic averages in many cases.
As such, stocks could offer a rare buying opportunity at the present time. Although their prices may come under further pressure due to the potential for difficulties being ahead for the world economy, over the long term they may prove to be highly attractive for income-seeking investors.
The market crash has caused many companies to offer high dividend yields. In some cases, this is merited due to the prospect of challenging trading conditions that could lead to a reduction in profitability and, ultimately, a dividend cut.
However, due to equities becoming less popular in recent months as investors have sought less risky assets, some companies with affordable dividends have also seen their stock prices fall and their dividend yields rise. They may be able to maintain their shareholder payouts through the current economic challenges, and could prove to be a worthwhile means of generating a generous passive income over the long term.
Even those businesses that have delayed dividends could have appeal for income investors. In some cases, it is likely to be a temporary withholding of dividends that ends as the outlook for the world economy improves over the medium term.
The prospect of generating a worthwhile passive income from other assets, such as cash and bonds, seems limited. Both assets now offer disappointing income returns due to low interest rates that could remain in place over the coming years.
Therefore, equities could prove to be the most attractive means of generating a high income return. Through focusing your capital on higher-yielding stocks that have solid financial positions and affordable dividends, you could enjoy a growing passive income over the coming years that improves your level of financial freedom.
History suggests that stock prices will not remain at low levels indefinitely, so now could be the right time to buy a range of income stocks for the long run.
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Returns As of 6th October 2020
Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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