Making a passive income with UK dividend shares could be a relatively appealing option. Certainly, the challenging economic outlook means many companies have reduced their shareholder payouts in the last year. Furthermore, a stock market rally has pushed many share prices higher.
However, it is still possible to earn a higher income return from stocks than from other assets. Therefore, through buying a diverse range of financially sound companies, it may be possible to enjoy an attractive passive income in the long run.
Making a passive income with UK dividend shares
Buying and holding UK dividend shares has been a popular means of making a passive income for many years. Yes, they have their downs as well as ups. But they have generally offered a higher income return than assets such as cash and bonds. However, at the moment, the difference between mainstream assets in terms of their income prospects is perhaps greater than it has been for a number of years.
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While indexes such as the FTSE 100 are expected to yield 3%-4% in the next 12 months, low interest rates mean that cash and bonds may struggle to beat inflation. Furthermore, with interest rates expected to remain at a low level for the next few years, this situation may not change at a brisk pace. This could mean cash savings and bonds struggle to provide an investor with a sufficient passive income to fund their spending commitments.
The risks of dividend stocks
Although there has been a stock market rally that has pushed the prices of many UK dividend shares higher, risks remain. The stock market has always been a volatile place to invest, where returns and dividends are never guaranteed. However, at the present time it is arguably riskier than it has been for a number of years. Coronavirus disruption and a weak economic outlook combine to create very difficult operating conditions for many businesses.
As such, it could be prudent to buy a diverse range of shares. That could spread the risk across many sectors and geographies. Similarly, a sound step may be buying companies that are more likely to survive a period of challenging economic conditions because of their low debt levels and high cash positions. They may still struggle, but they could be at less risk of reducing dividends or folding.
A long-term view
Of course, the track record of UK dividend shares and the economy suggests that a return to more upbeat operating conditions is likely over the long run. As such, despite their higher risks, they could represent a sound means of obtaining a generous passive income. And this could have the potential to grow at an above-inflation pace over the coming years. They may even benefit from a further stock market rally that helps to lift their valuations.
