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Buying cheap UK shares to make a passive income may be an unappealing idea to many investors after the 2020 market crash. The prospects for many FTSE 100 and FTSE 250 are relatively uncertain. This could mean dividend cuts or poor share price performances in the coming months.
However, high yields across the stock market, a likely economic recovery and a lack of opportunities elsewhere may mean that cheap UK shares offer a generous income opportunity. As such, now could be the right time for an investor to capitalise on low valuations across the FTSE 100 and FTSE 250.
The passive income prospects for some UK shares have deteriorated since the start of the year. Uncertain operating conditions and a weak economic outlook have combined to produce lower dividends. In some cases, companies and sectors have cancelled their dividends for the current year in response to challenging prospects.
However, other FTSE 100 and FTSE 250 shares continue to offer impressive income returns. They may, for example, have defensive business models that are less impacted by a weak economic outlook. When combined with weak investor sentiment towards the equity market, this means that many British shares currently offer high dividend yields.
On a relative basis, they could offer a significantly better passive income over the long run that other income-producing assets. For example, the FTSE 100 currently has a dividend yield of 4.7%. Making even a quarter of that income return from cash or investment-grade bonds is likely to prove difficult. Especially in an era where low interest rates look set to remain in place for some time.
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Dividend growth opportunities after the stock market crash
The stock market crash has dampened the prospect of passive income growth among UK shares. However, this doesn’t mean dividend growth will fail to return over the long run. After all, the economy has always recovered after its various downturns to produce positive GDP growth. This could mean that many FTSE 100 and FTSE 250 shares experience improving operating conditions in the coming years. And that should lift their profitability and the capacity to afford higher shareholder payouts.
Therefore, an investor may be able to obtain a generous income return today and an inflation-beating rise in dividends over the long run. This could further enhance the appeal of income stocks relative to other assets.
Of course, diversifying across a range of UK dividend shares is important when making a passive income. This reduces overall risks, since an investor will be less reliant on a small number of companies for their returns. It can also provide a smoother rate of income growth in the long run, which may lead to a worthwhile dividend stream as the world economy recovers from its present challenges.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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