Making a passive income has become far more difficult in 2020. Low interest rates mean that the returns on cash and bonds have plummeted, while rising house prices make buy-to-let investments more challenging for many investors.
At the same time, many UK shares have cut their dividends in response to a weak economic climate. But many British stocks still offer attractive yields, as well as dividend growth potential. So they may be the best means of making a worthwhile income at the present time.
Making a passive income with UK shares
Although dividend cuts have made it more difficult to make a passive income from UK shares, a wide range of FTSE 100 and FTSE 250 stocks still offer regular shareholder payouts. Therefore, it is possible to build a diverse portfolio of income shares that provides a relatively reliable payout today.
Furthermore, a growing proportion of companies are likely to resume shareholder payouts and grow their dividends as the economic outlook improves. Therefore, investors who have a long time horizon can not only receive dividends today, but are likely to benefit from their above-inflation growth in the coming years.
UK shares may also be a sound means of making a passive income because of their high yields. After the stock market crash, many high-quality companies are now trading at low prices. In some cases, they are significantly below their historic averages. This has pushed dividend yields to extremely high levels across some sectors. Therefore, obtaining a worthwhile income return may be a very achievable aim.
Lacklustre income opportunities
While making a passive income from UK shares is still possible, the same cannot be said for some other mainstream assets. Cash, for example, now offers a return of less than 1% in many cases. This means that investors would need to have vast amounts of capital just to generate a modest income. It’s a similar story for investment-grade bonds. They provide a relatively poor return that is unlikely to be sufficient for most income investors.
Meanwhile, rising house prices may mean that many income-seeking investors cannot afford to purchase a buy-to-let property. They may also be dissuaded from doing so by the difficulty of diversifying within the sector, as well as the uncertain prospects for the industry once government support measures begin to fade.
Therefore, on a relative basis, UK shares appear to offer the best means of generating a passive income today. Their high yields, the capacity to diversify across a wide range of businesses, and their dividend growth opportunities may mean that they produce a worthwhile income this year and in the coming years. As such, now could be the right time to start buying undervalued British shares after the recent stock market crash.
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.