How I'd invest for a passive income if the market crashes again

Making a passive income may become increasingly challenging if there is a further market crash. This plan could make that task easier.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Obtaining a passive income has become more difficult over the past few months, as a number of shares have cut their dividends. There may be further changes to dividend policies should another market crash occur later in the year, thereby making the task of generating an income return on your capital even more challenging.

However, by focusing on defensive shares with affordable dividends, you could build a resilient portfolio that offers a reliable long-term passive income.

Defensive shares

Some companies have been negatively impacted by the recent market crash and the uncertain outlook for the economy. Others, meanwhile, continue to offer an attractive passive income due to their business models being relatively defensive. In other words, they are less reliant on the economy's outlook than their share market peers.

As such, it may be prudent to purchase companies with defensive characteristics during a market crash. They may be less likely to cut or postpone their dividends, and may even be able to raise shareholder payouts to provide a growing passive income over the long run.

An affordable passive income

Companies that pay affordable dividends may also offer a more resilient passive income during periods of economic strain. A business that uses a modest portion of its net profit to pay dividends may not need to reduce its shareholder payouts in a scenario where its profitability comes under pressure.

Therefore, focusing your capital on companies with attractive dividend coverage ratios could be a shrewd move. The dividend coverage ratio is calculated by dividing net profit by dividends paid, with a figure in excess of 1 showing that profits fully covered shareholder payouts. However, to obtain a more secure dividend, investors may wish to purchase companies that have dividend coverage ratios that are in excess of one so as to enjoy a margin of safety.

Spreading the risk

Obtaining a passive income from a wide range of assets was possible prior to the global financial crisis. However, low-interest rates since then mean that the income returns on cash and bonds have been disappointing. They now look set to remain low over the coming years to support economic recovery.

Therefore, diversifying across a range of dividend shares is likely to become increasingly important. Investors may have a larger proportion of their portfolio in equities, which poses greater risks than having a mix of income-producing assets that includes cash and bonds.

Through buying multiple shares to create a passive income, you can lower your company-specific risk. This is the risk that one or more companies experience disappointing periods that have a large impact on your portfolio's overall performance. By spreading your capital across many businesses, it is possible to enjoy a more reliable income over the coming years – even if there is a further market crash.

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.

More on Share Market News

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Share Gainers

These were the best-performing ASX 200 shares in March

These shares made their shareholders smile in March thanks to some very big gains.

Read more »

Businessman using a digital tablet with a graphical chart, symbolising the stock market.
Opinions

2 ASX shares I have been buying in 2024!

I’m a believer in the long-term outlook of these stocks.

Read more »

Stock market chart in green with a rising arrow symbolising a rising share price.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a massive day for the ASX 200, with a new all-time high recorded.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Technology Shares

This ASX tech stock rocketed 60% in March! Can it keep on delivering?

After soaring in March, the ASX tech stock is now up 169% since this time last year.

Read more »

Broker Notes

Brokers name 3 ASX shares to buy now

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
Share Fallers

Why Burgundy Diamond Mines, Clarity Pharmaceuticals, EML, and Zip are sinking today

These ASX shares are ending the week in the red. But why?

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Share Gainers

Why Mesoblast, Newmont, Pilbara Minerals, and Platinum shares are jumping

These ASX shares are ending the week strongly. But why?

Read more »

a young boy dressed up in a business suit and tie has a cute grin and holds two fingers up.
Opinions

2 of my top ASX 200 shares to consider buying before April

I would happily exchange dollars for these two shares right now.

Read more »