Building a portfolio of UK shares to generate a passive income may not seem all that appealing to many dividend investors. After all, many FTSE 100 shares have cut or cancelled their dividends for 2020 after the recent market crash.
However, a number of stocks continue to offer higher income return prospects than other mainstream assets. And over time, the potential for dividends to return across FTSE 100 income stocks seems to be high.
As such, now could be the right time to build a dividend portfolio of cheap stocks that can produce a passive income in the long run.
Income opportunities among UK shares
The uncertain economic outlook means that many UK shares have reduced or even postponed their dividends following the market crash. Across the FTSE 100, companies operating in sectors such as banking, housebuilding and many others no longer offer a passive income for dividend investors in the current year.
However, this does not mean that it is impossible to build an income portfolio at the present time. A number of FTSE 100 stocks continue to pay their dividends, as coronavirus has not materially affected their financial performances. Those companies operate in sectors such as telecoms, consumer goods and mining. As such, while investors may need to pivot to income-producing sectors, it is still possible to obtain a generous passive income from large-cap shares in 2020.
Returning dividends
While the recent market crash means that many UK shares are not paying dividends this year, it seems likely that a large proportion of them will return to making shareholder payouts in the medium term.
The past performance of the FTSE 100 suggests that a return to growth is very likely. After all, it has always recovered from its various downturns to post new record highs. Similarly, the economy has always bounced back from its variety of recessions. This means that the financial prospects for many dividend shares may be relatively positive, which could allow them to resume making shareholder payouts as their operating conditions improve.
Relative appeal
Although it may be more difficult to make a passive income from UK shares at the present time due to reduced choice among dividend-paying stocks, on a relative basis, the FTSE 100 continues to have strong appeal.
Other assets such as cash and bonds offer returns that are substantially below 2% in many cases. By contrast, there are a number of stocks that offer significantly higher yields. They also offer the prospect of dividend growth as the economy’s outlook improves, while interest rates could spend a prolonged period at historic lows.
As such, now could be the right time to buy UK shares while they are cheap and offer attractive yields relative to other assets. They could produce high total returns that improve your long-term financial prospects.