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.

More reading

• Forget gold and Bitcoin. I’d buy cheap stocks in this market rebound to retire early
• ASX 200 rebounds 1.5%, Qantas drops on capital raising
• Can you clean up by investing in ASX waste management shares for the long-term?
• These exciting ASX shares could help you smash the market in the 2020s
• The latest ASX shares to be upgraded by top brokers to “buy”

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.

The post How I’d invest for a passive income if the market crashes again appeared first on Motley Fool Australia.

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Buying cheap stocks after the recent market crash may appear to be a risky move. After all, the stock market could move lower in the short run should there be a second wave of coronavirus, or if its impact on the world economy’s growth rate is greater than expected.

However, the chances of a market rebound and long-term recovery seem to be high. As such, now could be the right time to avoid other assets such as gold and Bitcoin, and instead purchase high-quality companies while they offer wide margins of safety to increase your chances of retiring early.

Diverse opportunities

With the stock market having experienced a hugely challenging period over recent months, it is unsurprising that investors may be considering purchasing other assets such as Bitcoin and gold. Their prices have outperformed the wider stock market over the past few months, and this trend may continue in the short run.

Gold, for example, has historically offered defensive appeal due to it being viewed as a store of wealth by many investors. However, its price level is currently close to an all-time high. Therefore, there may be less scope for capital growth than there has been in the past. And, with investor sentiment towards riskier assets such as equities likely to improve over the coming years, gold may fail to maintain its recent momentum over the long run.

Bitcoin, meanwhile, has surged higher following its falls in the earlier part of 2020. Investors seem to be attracted to its diversification potential. However, with Bitcoin’s price being determined solely by investor sentiment, it could offer a highly volatile outlook. It may also suffer from regulatory risks, while other virtual currencies could become increasingly popular and reduce demand for Bitcoin. As such, it offers a high-risk outlook that may not make it suitable for investors who are seeking to build a retirement nest egg.

Buying cheap stocks

By contrast, buying cheap stocks today and holding them for the long run could be a sound strategy for anyone who is looking to retire early.

The track record of the stock market shows that it has been able to successfully recover from every one of its past crises, and in doing so has posted new record highs. Although the prospect of this taking place may seem unlikely at the present time while news flow is negative, investors with long-term time horizons are likely to have sufficient time available for the stock market to deliver a successful turnaround after its recent crash.

Therefore, buying a diverse range of high-quality companies while they trade at low prices could improve your retirement prospects. As well as cheap stocks, the stock market offers diversification potential and income appeal that could further improve your portfolio’s risk/reward ratio compared to other assets such as Bitcoin and gold.

More reading

• ASX 200 rebounds 1.5%, Qantas drops on capital raising
• Can you clean up by investing in ASX waste management shares for the long-term?
• These exciting ASX shares could help you smash the market in the 2020s
• The latest ASX shares to be upgraded by top brokers to “buy”
• I think WAM Microcap is a retiree’s dream dividend share

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.

The post Forget gold and Bitcoin. I’d buy cheap stocks in this market rebound to retire early appeared first on Motley Fool Australia.

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