Relying on dividend shares for a passive income in retirement may become an increasingly likely scenario for many people. Low-interest rates mean that income-producing assets such as cash and bonds may be unable to provide a sufficient income to cover living costs in older age.

Clearly, dividend shares are riskier than many other mainstream assets. However, through holding cash for emergencies and identifying high-quality businesses, it may be possible to rely on dividend shares for a passive income in retirement.

The risks of holding dividend shares

Dividend shares experience price fluctuations like any other asset. However, capital returns may not be the main priority of retirees. They may be more focused on the level of income received from their portfolio. This could prove to be unreliable due to the risks faced by the world economy.

For example, many income shares have decided to reduce or cancel their dividends in response to the uncertain operating conditions they now face. A retiree who holds such companies will now experience a fall in their income in the short run. Although dividends may return among businesses who have delayed or cancelled, there are no guarantees that this will take place.

Therefore, relying on dividend shares for a passive income is a riskier strategy compared to holding lower-risk assets. There is always a chance that dividend cuts will negatively impact on your level of income.

Low relative returns

The problem facing retirees is that, in most cases, dividend shares offer a far superior income return than other mainstream assets. Low-interest rates mean that cash and investment-grade bonds may provide an insufficient level of income. Since policymakers may attempt to support the economy’s recovery through a loose monetary policy, the prospect of higher interest rates seems limited.

Building a portfolio for dividend shares

Therefore, many retirees may find that they focus their capital on dividend shares in order to generate a sufficient level of income. Should this be the case, buying a diverse range of businesses could help to lower your risks. You will be less reliant on a small number of companies to provide a passive income in retirement.

Similarly, purchasing companies with defensive business models and sound finances could further strengthen your passive income. They may be better equipped to survive an economic downturn, and therefore less likely to reduce their dividend payments.

Investors may also wish to hold cash to provide support and peace of mind should dividend cuts be ahead. This would also provide financial resources to overcome challenging economic periods that limit dividend-paying shares over a period of time.

More reading

• Top brokers name 3 ASX 200 shares to sell next week
• Top brokers name 3 ASX 200 shares to buy next week
• Why I’d buy cheap stocks in today’s market
• Where I would invest $50,000 into ASX shares immediately
• How I’d invest in today’s market to make a million

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.

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Buying cheap stocks after the recent market crash may not seem all that appealing to many investors. With the potential for a second wave of coronavirus across many of the world’s major economies, stock prices could come under further pressure in the coming months.

However, the past performance of the stock market shows that it has always been able to recover from crashes to post new record highs. Therefore, buying cheap stocks that have solid financial positions today could provide you with the greatest scope to benefit from a turnaround for equities over the long run.

Recovery potential

While a return to previous highs may not seem all that likely in the short run (despite the recent rally), over the long term it seems probable. The stock market has a strong track record of recovering from challenges such as the global financial crisis, the tech bubble and many other difficulties that have caused investor sentiment to weaken and cheap stocks to become more widely available.

Certainly, coronavirus is an unprecedented event for investors to overcome. It is still too soon to know how significant its impact will be on a wide range of sectors and economies. But previous downturns and bear markets have spawned the same uncertainties among investors. Yet, sentiment has always proceeded to improve after even the most severe declines in stock prices.

Buying cheap stocks

Many investors aim to buy stocks when they are low, and sell them when they are high. One of the main difficulties in implementing this strategy is that for a stock to be cheap, there often must be a significant risk ahead that prompts weaker financial performance or declining investor sentiment.

At the present time, many of the risks facing the world economy appear to have been priced in to stock valuations by investors. Therefore, it is possible to buy high-quality businesses while they are trading on low valuations. This could provide you with a more attractive risk/reward opportunity, since buying any asset at a lower price can provide greater scope for capital growth.

Although there is a risk that cheap stocks will continue to fall in price, over the long run many valuations on offer across the stock market suggest that a wide margin of safety may already be on offer.

Financial strength

Of course, for cheap stocks to deliver on their long-term recovery potential, they must survive a challenging short-term outlook. Therefore, it is vital that investors select companies that have attributes such as modest debt levels, dominant market positions and the right strategies to reduce costs if required in the short run.

Through buying the most appealing businesses while they trade on low valuations, you could boost your portfolio’s long-term growth prospects and improve your financial circumstances in the coming years.

More reading

• Where I would invest $50,000 into ASX shares immediately
• How I’d invest in today’s market to make a million
• Why ETFs are great for passive investing
• Where to invest $10,000 into ASX shares next week
• Why the ultra-rich are hoarding gold

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.

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If I were fortunate enough to have $50,000 sitting in a savings account, I would consider putting it to work in the share market.

After all, the potential returns on offer are vastly superior to what you’ll get from an Australia and New Zealand Banking GrpLtd (ASX: ANZ) savings account.

For example, at present, ANZ is offering a lowly 0.05% per annum standard variable rate. This is roughly in line with what the other big banks are offering and would yield just $250 in interest per year.

As a comparison, over last 30 years the Australian share market has generated an average annual return of approximately 9.5%. If it were to do this again over the next 12 months, your $50,000 would turn into $54,750.

With that in mind, I have picked out three top shares which I think could provide strong returns for investors over the coming years. They are named below:

Altium Limited (ASX: ALU)

Altium is a printed circuit board design software company which is benefitting greatly from the rapidly growing Internet of Things (IoT) market. With more and more electronic devices being designed and manufactured, the company has been experiencing increasing demand for its key Altium Designer product. And with the IoT market tipped to grow materially in the future, Altium looks well-placed for growth.

Domino’s Pizza Enterprises Ltd (ASX: DMP)

Another ASX share to consider buying is Domino’s. I think the pizza chain operator would be a great option for these funds due to its strong brand, popular product, and its positive long term outlook. Over the next five years Domino’s aims to deliver annual same store sales growth of 3% to 6% and annual organic new store additions of 7% to 9%. I expect this to underpin strong earnings growth for many years to come.

NEXTDC Ltd (ASX: NXT)

A final ASX share to consider buying is this data centre operator. NEXTDC has been experiencing significant and growing demand for its world class centres over the last couple of years. This has particularly been the case in 2020 after the pandemic accelerated the shift to the cloud. I expect this trend to continue and support very strong earnings growth as it scales.

More reading

• 3 quality ASX shares to buy now to get rich later
• I would buy and hold Kogan and these ASX shares until 2030
• 3 ASX shares I’d buy because of the online sales boom
• Should you buy Domino’s shares right now?
• 2 ASX shares to buy for beginners

James Mickleboro owns shares of NEXTDC Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Altium. The Motley Fool Australia has recommended Domino’s Pizza Enterprises Limited. 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 Where I would invest $50,000 into ASX shares immediately appeared first on Motley Fool Australia.

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The recent share market crash could present a buying opportunity for investors who can adopt a long-term approach to their portfolios. Of course, in the short run, many share prices could experience declines, should the global economic outlook deteriorate.

However, by focusing your capital on the highest-quality shares available and diversifying across a range of sectors, you could obtain a favourable risk and reward ratio while prices are low. This could increase your chances of making a million over the coming years.

A long-term approach

Investing during, or shortly after, a market crash can lead to disappointing results in the short run. For example, the economic impact of coronavirus may prove to be worse than investors are factoring. This may cause share prices to experience further falls that produce paper losses for investors.

As such, it’s important to adopt a long-term approach when investing during high share market volatility. The track record of equities shows that they experience periods of decline at fairly regular intervals. However, these periods have been followed with strong recoveries leading to record share market highs. As such, buying shares today while they offer wide safety margins could enable you to benefit from the long-term recovery potential.

A focus on quality

As with every economic downturn, some companies will not survive. For example, it may experience a decline in sales and be unable to pay fixed costs. Or, it may have taken on too much debt during the economic boom and be unable to service it.

Therefore, it is worth assessing the financial strength of a business before purchasing a slice. This may include focusing on its debt levels, cash flow strength and interest coverage ratio to realise the likelihood of it surviving a period of low sales. It may also be worth checking the company’s performance in prior economic downturns to assess its defensive characteristics when sales were under pressure.

Diversifying across multiple sectors

On top of buying high-quality companies for the long term, diversifying across sectors may be a sound move during a market crash. Some sectors, such as travel and leisure, may struggle to emerge intact from the current crisis. They may face a prolonged period of weaker demand that reduces return prospects.

As such, having exposure to a range of sectors could reduce overall risk and improve return prospects. This could enable you to fully access the share market’s long-term recovery potential. And it could boost your chances of generating a 7-figure portfolio in the coming years.

More reading

• Why ETFs are great for passive investing
• Where to invest $10,000 into ASX shares next week
• Why the ultra-rich are hoarding gold
• Which shares to buy if the ASX tumbles
• 2 blue chip ASX 200 dividend shares to buy next week

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 in today’s market to make a million appeared first on Motley Fool Australia.

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Exchange-traded funds (ETFs) are great for passive investing in my opinion.

The idea behind an ETF is that investors can buy a fund through a stock exchange like the ASX. Previously, people had to apply to the fund provider directly and buy unlisted units.

Some of the biggest providers in Australia are Vanguard, Blackrock (iShares) and BetaShares.

Here are some of the main reasons why they’re great for passive investing:

Usually based on a diversified index

ETFs are usually diversified because they’re based on a good, diversified index.

Diversification is an important part of lowering investment risk. Being invested in dozens or hundreds of shares is usually lower risk than owning a portfolio of a handful of shares.

For example, Vanguard Australian Shares Index ETF (ASX: VAS) is invested in 300 ASX shares and iShares S&P 500 ETF (ASX: IVV) is invested in 500 US shares.

Something like Vanguard U.S. Total Market Shares Index ETF (ASX: VTS) is invested in thousands of shares.

Not only do ETFs offer diversification by the sheer number of shares owned, but the broad based ETFs are also invested across a variety of industries like IT, healthcare, industrials and so on. Owning shares in different industries helps in times like this current COVID-19 era. 

However, you can also invest in industry-specific ETFs like BetaShares Asia Technology Tigers ETF (ASX: ASIA) or Vanguard Australian Property Securities Index ETF (ASX: VAP).

Constantly shifting holdings

One of the most difficult things with investing in individual shares is that it’s hard to know what to buy and when to sell.

I’ve already mentioned that ETFs offer upfront diversification. But I like that you don’t have to think about what to buy or sell with this type of investment. It’s regularly making the automatic investment decisions for you.

As businesses get bigger and claim more market share, they’ll become a bigger part in the index. Similarly, if there are shares that are performing poorly then their market caps will decline and they will become a smaller part of the ETF’s holdings.  

Low costs

One of the biggest benefits of ETFs is that the best ones come with very low costs. Tracking an index doesn’t cost much for the provider. It’s not like an active fund manager that charges high fees.

Some options have management fees that are very close to 0%, which leaves more of the returns in the hands of the investor. The iShares S&P 500 ETF has an annual management fee of 0.04%, Vanguard U.S. Total Market Shares Index ETF has an annual management fee of 0.03% per annum. Even BetaShares Australia 200 ETF (ASX: A200), an ETF focused on the ASX, only has an annual management fee of 0.07%.

Fees can act like termites on your nest egg fund. If you’re paying high fees it could mean tens of thousands of dollars less for your portfolio by the time you hit retirement.

Solid returns

There is a lot of analysis out there that shows a lot of active managers regularly underperform the index, particularly after fees. There are some fund managers that add value, but you have to be picky finding them.

You hardly need to do any investing research to invest in an ETF, yet it’s possible to produce returns better than a professional who’s looking at shares full time. How great is that?

Different options have different performances. The ones that have a high level of exposure to US shares have done particularly well in recent years.

For example, the iShares S&P 500 ETF has returned an average of 15.7% per annum over the past decade to 31 May 2020.

Over the past five years BetaShares NASDAQ 100 ETF (ASX: NDQ) has produced an average return per annum of 20.1%.

Vanguard Australian Shares Index ETF has produced an average return per annum of 7% per annum over the past decade. Australian shares haven’t performed as well, but don’t forget that we’re in the middle of the COVID-19 pandemic which has hurt bank share prices more than some other sectors.

Foolish takeaway

I think that passive investing is the way to go for many people, particularly if they don’t have the time or mindset to invest in individual shares. You could even create a portfolio with a combination of ETFs and the best individual growth shares. 

More reading

• These 3 ASX ETFs are yet to recover from the market crash
• 3 quality ASX shares to buy now to get rich later
• How the ASX 200 can help first home buyers save for a deposit
• I don’t normally buy ETFs, but I would buy these 2
• Looking to diversify your portfolio? Try these ASX ETFs

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended BETANASDAQ ETF UNITS and BetaShares Asia Technology Tigers ETF. 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.

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