Stock market recovery: 3 steps I’d take to earn a passive income right now

I think buying a diverse range of higher-yielding dividend shares with solid financial positions could produce an attractive passive income.

Peter Stephens ❯

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 3 February, 2021 9:51 am GMT

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Despite the recent stock market recovery, high risks continue to be present across a variety of FTSE 350 sectors. As such, making a passive income may be more challenging, and riskier, than it has been for many years.

This means that diversifying among various stocks and sectors may be more important than usual. Furthermore, through buying higher-yielding shares with sound finances, it may be possible to build a robust and attractive income stream in 2021 and in the coming years.

Building a diverse passive income stream

Diversifying among many sectors and companies has always been important when seeking to make a passive income. However, due to the challenging economic outlook currently present, it may be more crucial than it has been for some time.

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Looking ahead, it’s very difficult to gauge how specific sectors will perform in the current year, as well as in the long run. For example, they may be subject to disruption caused by coronavirus restrictions this year that affects their ability to pay dividends.

They may also face changes prompted by the pandemic. This includes shifting consumer shopping habits that require major investment in order to avoid being left behind.

Through owning a wide range of companies that operate in a variety of sectors, it may be possible to spread these risks. This may result in a more reliable and robust passive income in 2021 and in the coming years.

Buying high-yielding dividend shares

As ever, buying dividend shares that offer a relatively high passive income return could be a shrewd move. They could provide a generous income stream that makes a positive impact on an investor’s financial position in the coming years.

However, it’s crucial to check the affordability of a company’s dividend before buying it. For example, it could only just be covered by net profit. And that means there’s a greater chance of it being cut. Over half of FTSE 100 companies reduced, cancelled or postponed their dividends in 2020.

That means the potential for falling dividends is a very real threat currently facing investors. Stocks with high dividend cover may be less likely to follow suit in future.

Investing money in industry leaders

Companies with dominant market positions are not guaranteed to produce a more reliable passive income. However, they may be more able to survive a period of weaker sales growth because of a competitive advantage that they enjoy over sector peers.

They may even be able to capitalise on the challenges faced by their rivals to strengthen their long-term growth prospects.

As such, buying market leaders could be a sound move. It may mean less risk and greater income potential over the coming years. Certainly in what could prove to be a recovering, but volatile, UK and global economy.