After falling by around 15% from its recent high, the FTSE 100 now has a dividend of just over 5%. This is around four times the best interest rates that are available on Cash ISAs at the present time.
Although buying FTSE 100 dividend stocks is far riskier than having a Cash ISA, over the long run, they could deliver significantly greater returns than holding cash.
As such, now could be the right time to buy a diverse range of large-cap shares to enhance your income prospects over the coming years.
FTSE 100 appeal
The FTSE 100’s dividend yield has increased to 5% as a result of its recent decline in price. In the short run, its price could fall even further due to the ongoing risks regarding the impact of the coronavirus on the world economy.
However, in the long run it could offer an impressive return outlook for income investors. Not only does its high yield suggest that its income return could be high, it also indicates that the index offers good value for money. Therefore, its total returns may prove to be impressive – especially when compared to those of a Cash ISA.
Furthermore, the FTSE 100 could deliver dividend growth. This may not be at an especially fast pace in the short run due to the possible impact of the coronavirus on the world economy. But over time, dividend growth among FTSE 100 shares may outpace the rise in interest rates on Cash ISAs.
Risk reduction
As mentioned, buying FTSE 100 shares is a riskier move than having a Cash ISA. However, the risk of loss can be reduced through purchasing a diverse range of shares. This limits the impact of one stock’s performance on your wider portfolio, and may help you to generate a more robust and sustainable income return.
In addition, the FTSE 100’s long-term prospects continue to be relatively bright. It has experienced downturns similar to the one currently in progress many times since its inception 36 years ago. It has recovered from all of them, which suggests that if you have a long time horizon then buying shares could be an effective use of your capital.
Another means of reducing your risk when buying dividend shares is to focus your capital on companies that have highly affordable dividends. In other words, they do not use a too-large proportion of their annual profit to make shareholder payouts. This could reduce the chances of dividend cuts. Similarly, buying shares with strong track records of paying robust dividends could improve the resilience of your passive income.
Buying today
Buying shares while they are subject to major price declines may seem to be a risky move. It could lead to paper losses in the short run but, in the long term, it may produce significantly higher returns than those offered by a Cash ISA.
