Building a dividend share portfolio at the present time could be a means of generating a generous passive income over the coming years. Valuations across the share market are relatively attractive after the March market crash from the coronavirus, with many shares offering wide margins of safety.
Furthermore, a lack of appeal among other income-producing assets may increase demand for dividend shares in the long run. With stimulus packages rolled out in major economies, the growth prospects for many industries could improve significantly.
Low valuations in a dividend share portfolio
Due to the March market crash, it is possible to build a dividend share portfolio that contains companies with low valuations. Although investor sentiment rebounded sharply after the market’s crash, many companies continue to trade on valuations that are below their long-term averages. This may mean that they offer relatively high yields that produce a generous passive income.
It may also lead to impressive capital returns in the coming years. Buying shares when they trade at attractive prices has previously been a successful means of generating above-average total returns. As the share market gradually recovers, your portfolio’s value could rise. This may make it easier to generate a passive income in the long run.
A dividend share portfolio may offer significantly greater income prospects than other assets over the coming years. Interest rates have been relatively low for a number of years, and may now fail to rise rapidly as policymakers across the world seek to provide support to their economies. This may reduce demand for income-producing assets such as bonds and cash, which could push many income-seeking investors towards dividend shares.
Therefore, as well as offering a relatively high yield, dividend shares could become increasingly popular among investors. This may help to push their share prices higher, thereby leading to greater total returns for investors who hold them as part of a diversified portfolio.
Owning a dividend share portfolio may not produce high returns in the short run. The prospects for positive global economic growth have rapidly declined over the past few months, and risks such as a second wave of coronavirus may continue to weigh on the outlook for world GDP.
However, the global growth outlook could be positively impacted by fiscal and monetary policy stimulus taking place in major economies. After all, stimulus packages implemented in the global financial crisis had a positive impact on asset prices and economic activity.
Although this may not lead to instant gains for dividend share prices, over the long run it is likely to produce capital growth. Alongside the relatively high-income returns available on many dividend shares, the end result could be attractive total returns that make now the right time to start building a dividend share portfolio.
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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.