The FTSE 100’s recent crash poses a difficult question for retirees seeking to generate a passive income from their portfolio. Ok, the index offers exceptionally high yields. But an uncertain economic outlook could mean many of its members cut their dividends over the coming months.
Alongside this quandary is that other assets, such as cash and bonds, now offer very unappealing income returns. So what could be the best course of action for retirees seeking to make a passive income?
Income opportunities
Identifying companies that offer relatively resilient dividend outlooks could be a good starting point at the present time. Certainly, there are no guarantees any company will maintain its dividend payout. Coronavirus could negatively impact on the world economy to a greater extent than is currently forecast. This may lead to highly challenging trading conditions for a wide range of businesses.
However, some companies may be better able to overcome near-term challenges than others. Businesses that operate in relatively stable industries which are less reliant on the world economy’s performance could have a better chance of maintaining their dividend payouts. For example, healthcare and utility companies could deliver relatively stable dividends over the coming quarters.
Likewise, businesses with solid balance sheets and strong cash flow may be less likely to cut their dividends. And those companies with dividend payments covered multiple times by net profit may be in a strong position to maintain, or even grow, their shareholder payouts.
Risk/reward
Of course, more stable businesses generally offer lower yields at present. In other words, investors can obtain higher potential income rewards for taking on more risk. For example, oil and gas stocks currently have high prospective yields. However, investors seem to have priced in the prospect of dividend cuts in many cases.
Therefore, investors may wish to focus on company fundamentals and consider how dividend cuts would impact on their living standards. By focusing on lower-risk businesses, you may be able to obtain a more resilient passive income at a time when other options, such as cash and bonds, may fail to offer a sufficiently high income return to make them realistic alternatives to FTSE 100 shares.
Recovery potential
In the long run, the FTSE 100 appears to offer strong recovery potential. It, and the world economy, have always recovered from their multitude of crises in the past to produce strong growth. Although the current challenges facing the world economy could lead to dividend cuts, postponements, and cancellations, the relative appeal of FTSE 100 income shares appears to be high.
As ever, holding some cash on hand in case of emergency and focusing on high-quality businesses while they trade on low valuations could be a logical response to the FTSE 100’s recent crash.