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Stock market rally: how I’d invest £20,000 in UK shares to make a passive income

Young mixed-race woman looking out of the window with a look of consternation on her face

With the stock market continuing to wobble on the back of high inflation, a rally isn’t at the top of everyone’s mind today. However, history has shown time and time again that bear markets don’t last forever. And are always eventually followed by an explosive comeback.

UK shares are no different. And with plenty of dividend-paying stocks still distributing earnings, there are passive income opportunities for my portfolio everywhere!

Needless to say, such opportunities aren’t always easy to come by. And by identifying strong high-yielding dividend shares, a £20,000 investment today could be worth considerably more in the future.

Buying before the stock market rally

Since the start of 2022, the FTSE 100 is only down around 5%. While some constituents have fallen on their knees, others remain resilient to the current environment. Sadly, the same can’t be said for the FTSE 250, which is down nearly 22% over the same period.

With consumer spending facing enormous pressure, plenty of businesses are seeing growth get slashed. Yet, in some cases, this isn’t a catastrophic problem, merely a short-term hurdle.

There’s no denying that not all companies will make it through the current storm. But for the UK shares with solid balance sheets, resilient cash flows, and prudent leadership, today’s cheap valuations look rather tasty, in my opinion. Especially for those with high dividend yields.

No one knows when the stock market rally will begin (it may have already started). But I’m confident that the stock prices of high-quality businesses will recover in the long term before climbing to new highs.

We may already be at the bottom. Or things may continue spiralling downwards. Regardless, I think plenty of stocks are already trading at significant discounts today. That’s why I’ve already begun topping up my positions in my ISA.

If things continue to go south, I may be able to get better prices in the coming weeks or months. But suppose the recovery has already started? In that case, my window of opportunity to secure cheap passive income could already be closing.

Diversifying when investing in UK passive income shares

As always, picking only a handful of companies to double down on isn’t the wisest move. While portfolio concentration can lead to higher returns, it also exposes investors to far greater risk.

As many investors have recently learned, external forces can be sudden and create enormous headwinds. They can even lead to dividends being cut, or suspended, on short notice. But by spreading my investments across multiple high-quality businesses in various industries, my passive income stream is less likely to become compromised.

With plenty of high-yielding UK shares primed to surge during the eventual stock market rally, I believe it’s possible to build a solid dividend portfolio in 2022.  

The post Stock market rally: how I’d invest £20,000 in UK shares to make a passive income appeared first on The Motley Fool UK.

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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.