Making a passive income has become increasingly difficult since the start of 2020. Continued low interest rates and challenging trading conditions mean there are fewer opportunities to earn a sound income return than there were even just a handful of months ago.

However, by focusing your capital on companies with defensive characteristics and affordable dividends, you could generate a worthwhile income return over the long run. It could improve your financial prospects and enable you to enjoy a greater degree of financial freedom.

Passive income prospects

With interest rates likely to remain at low levels over the medium term as policymakers seek to support the economy, making a passive income from assets such as cash and bonds may become more difficult. They may be unable to provide a sufficient return on your capital, and may even reduce your spending power if their returns lag inflation.

Therefore, buying dividend stocks could be the most worthwhile means of obtaining an income return over the coming years. Even though stock prices could be volatile over the coming months, weak investor sentiment may mean that the yields on offer across many stock market sectors are highly attractive relative to other income-producing assets. By purchasing a diverse range of high-yielding stocks, you could generate a much higher income return than that available through other mainstream assets.

Defensive characteristics

While some companies have decided to reduce or postpone their dividend payments over recent months, others continue to offer an appealing passive income. They often include businesses with defensive characteristics, whereby their business models are less correlated with the wider economy’s performance than many of their index peers.

For example, companies operating in the utility and consumer goods sectors may be less impacted by coronavirus than businesses in the retail and travel & leisure industries. As such, buying companies with business models that are less likely to be impacted by a slowdown in global GDP growth could be a means of obtaining a solid income return after the recent market crash.

Affordable dividends

Buying stocks that have affordable dividends could be another means of obtaining a solid passive income at the present time.

Many businesses are likely to experience slowing demand for their goods or services as factors such as rising unemployment and weak consumer confidence take hold in many of the world’s major economies. If they have dividends that were previously very affordable, in terms of being easily covered by net profit over the past few years, they may be less likely to cut shareholder payouts in response to a period of weaker profitability.

Therefore, by assessing the affordability of a company’s dividend, you could build a more robust income stream in what may prove to be a challenging period for income-seeking investors.

More reading

• 3 of the best ASX growth shares to buy for the 2020s
• 3 very reliable dividend shares I plan to pay for my retirement
• 3 top ASX dividend shares I would buy next week
• Here are 3 ASX COVID-19 success stories
• These were the best performing ASX 200 shares last 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.

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