Pension 101: how to generate a sustainable passive income in a volatile stock market

Here’s how you could limit your risks to obtain a resilient income stream from dividend stocks.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

The stock market’s inherent volatility can make it difficult for an investor to obtain a robust passive income from equities. After all, the track record of indexes such as the S&P 500 and FTSE 100 shows that bear markets have been commonplace throughout their history.

While it is not possible to eliminate risk completely when buying stocks, investors who focus on companies that have defensive characteristics and solid track records of paying dividends may find that their income prospects are more reliable.

Furthermore, through diversifying across a range of industries and geographies, dividends could be more sustainable over the long run. This may lead to a more robust passive income for investors.

Defensive characteristics

Companies that exhibit defensive characteristics could offer relatively solid dividend outlooks. In many cases, they may be mature businesses that have been in existence for a long time period. This could afford them with strong cash flow that can be paid to shareholders as a dividend, rather than being reinvested to generate improving returns. The end result could be that the company in question has a dividend that is resilient and can rise over the long run.

In addition, defensive stocks usually operate in industries that are less dependent on the wider economy when it comes to their financial performance. For example, healthcare stocks, tobacco businesses and utilities may be less impacted by economic change than cyclical industries such as travel, retail and banking. As such, focusing your capital on industries with a greater independence from economic events could produce a more sustainable income stream.

Diversity

Of course, a key means of reducing portfolio risk is to diversify. This reduces the impact of one company’s financial performance on your wider portfolio. Diversification is easier to achieve than ever, with the cost of sharedealing having fallen in recent years. As a result, it is relatively cheap for any investor to build a portfolio of companies that provide exposure to a range of geographies and industries.

Furthermore, with the world economy experiencing significant change at the present time, hedging your bets could be a sound idea. It is difficult to predict which regions of the world will deliver on their forecasts, and also which industries will become obsolete in the coming years. By having a mix of appealing dividend stocks, it may be possible to lessen this risk.

Track records

Although past performance is not a perfect guide to the future, companies that have a solid track record of dividend growth may be more likely to maintain this performance in the long run. Therefore, studying a company’s past dividend payments, and how they have grown over the years, may increase the resilience of your passive income.

Clearly, stocks will always be riskier than other assets such as cash and bonds. But the returns they offer could make them a worthwhile means of generating a passive income in the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Retirement Articles

New year resolutions 2025 on desk. 2025 resolutions list with notebook, coffee cup on table.
Investing Articles

2 cheap UK shares and a soaring ETF that could look good in an ISA in 2025!

The FTSE 100 and FTSE 250 are packed with brilliant bargains as the stock market sells off again. Here are…

Read more »

A senior man and his wife holding hands walking up a hill on a footpath looking away from the camera at the view. The fishing village of Polperro is behind them.
Investing Articles

How much would I need in an ISA to earn a £1,000 monthly passive income?

The exact amount needed for a healthy passive income may depend greatly on the type of ISA an individual uses.…

Read more »

Investing Articles

How to try and turn a £50K SIPP into a £250K retirement fund

Christopher Ruane explains how a long-term approach and careful share selection could potentially help an investor quintuple the value of…

Read more »

The words "what's your plan for retirement" written on chalkboard on pavement somewhere in London
Retirement Articles

After a 20% gain in 2024, here’s how I’ll be investing my Stocks and Shares ISA and SIPP in 2025

Edward Sheldon is saving for retirement in a Stocks and Shares ISA and pension. Here’s how he’ll be investing in…

Read more »

Investing Articles

2 S&P 500 funds to consider for huge profits in 2025!

Are you optimistic about the S&P 500's prospects in the New Year? These quality exchange-traded funds (ETFs) could be worth…

Read more »

Investing Articles

If a 40-year-old put £500 a month in a Stocks & Shares ISA, here’s what they could have by retirement

Late to investing? Don't worry. Here's how a regular long-term investment in a Stocks and Shares ISA could generate huge…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Consider these 3 steps in 2025 to target a winning second income!

Royston Wild picks three of his favourite investing strategies that can help individuals build an enormous second income.

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

7 top tips to consider for an £88k passive income!

A regular monthly investment in trusts or shares could yield a stunning passive income in retirement. Here's how an investor…

Read more »