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There are lots of ways to earn passive income, but top of my list is collecting dividends from companies. And a stock market crash could be a huge opportunity.
Falling share prices mean higher dividend yields and this can create incredible opportunities. But which stocks should investors have on their radars right now?
Dividend yields
The maths behind why a stock market crash can be a huge opportunity is straightforward enough. An investment return is what you get back as a percentage of what you pay out.
In terms of passive income, that’s the amount a company pays out in dividends as a percentage of its share price. And there are two ways for this number to go up.
One is the business returning more cash to shareholders. Other things being equal, a higher dividend per share means a higher dividend yield for investors.
The other way is by the share price falling. Even if the dividend per share stays the same, paying less for the stock means a higher yield – and this is what can happen in a crash.
Long-term investing
That means a stock market crash can be a great chance to take advantage of some unusual dividend yields. And a really good example was Shell (LSE:SHEL) during the Covid-19 crash.
In 2020, the stock traded with a dividend yield of 6.5%. That’s because the main risk for it as an investment – lower oil prices – manifested itself in a big way when demand fell due to lockdowns.
Investors were expecting a dividend cut. And that did come at the end of the year, but things have recovered very strongly since then and the dividend is back above pre-pandemic levels.
The share price, though, is up 225% since December 2020, so the chance to buy Shell shares with a 6.5% yield isn’t there any more. That opportunity was only there during the Covid crash.
What’s next?
Not every stock market crash is the same. Oil prices went negative during the pandemic, but the big issue right now is that they’ve jumped 60% in a week as a result of the conflict in Iran.
Something similar is true of natural gas, which is Shell’s main product. So I’m not convinced this is the stock to be looking at if the current volatility turns into a full-blown crash.
But in terms of opportunities, a number of companies are likely to find higher oil prices push up costs. And some of these might well be worth keeping an eye on going forward.
The key for investors isn’t always finding dividends that won’t get cut. As the example of Shell shows, what matters most for long-term passive income is a company’s business prospects.
One final thought
An outstanding passive income stock doesn’t have to involve a huge dividend yield. A fast-growing company with a moderate yield can become interesting in a market crash.
Investors shouldn’t ignore these opportunities. While high yields often jump out in a screener, the long-term returns that come from buying quality shares at discount prices can be huge.
In the stock market, no two crashes are the same. But whenever share prices fall, investors who are willing to be brave can find the kind of opportunities that aren’t available most of the time.
