3 steps I’d take to make a passive income with cheap UK dividend shares

The stock market crash has caused many UK dividend shares to offer relatively high yields. As such, it is possible to obtain a generous passive income compared to the returns available on other assets, such as cash and bonds.

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Through buying a diverse range of high-quality businesses that offer dividend growth potential, you could obtain a robust and surprisingly large passive income in the coming years.


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High-quality UK dividend shares

While some UK dividend shares may have exceptionally high yields after the market crash, it may be a better idea to accept a lower yield for a better quality business. Certainly, this strategy may not maximise your passive income over the short run. However, it could mean that your dividends are more reliable at a time when the economic outlook is very uncertain.

As such, focusing on a company’s financial strength, cash flow and the affordability of its dividend could be a shrewd move. This can be achieved through free resources available online, such as looking through a company’s annual report before adding it to your portfolio. It may mean that you avoid stocks that have attractive yields, but that may be unable to pay them should their operating conditions come under pressure in a turbulent economic period.

Dividend growth opportunities

Different UK dividend shares face a range of outlooks at the present time. For example, some sectors such as healthcare and utilities may face relatively favourable operating conditions, despite the current situation in the wider economy. However, other industries such as banking and travel & leisure could experience further difficulties over the coming months as demand for their services remains at low levels.

Therefore, it could be a good idea to assess the financial prospects of any stocks you are thinking about buying. This may provide an indication as to their potential to deliver dividend growth over the medium term. And while high yields are always attractive right now, it may be a better idea to accept a lower yield today for a higher chance that it will rise at a faster pace than inflation over the coming years. This may lead to a larger passive income from UK dividend shares in the long run that improves your spending power.

A diverse income portfolio

As ever, building a diverse portfolio of UK dividend shares is crucial to obtaining a solid passive income. Even stock that are performing well at the present time and that have solid outlooks may experience challenges that negatively impact on their shareholder payouts.

Through having a mix of companies that operate in different sectors and regions within your portfolio, you can diversify away a considerable amount of risk. This can provide a more stable and resilient passive income over the long run that impacts positively on your financial outlook.

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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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