The FTSE 100’s recent crash means many of its members currently trade on exceptionally low valuations. Certainly, in many cases, their earnings are set to decline in the current year. But the index’s recovery potential suggests now could be an opportune time to buy them.
Furthermore, the options available to income-seekers are relatively limited at the present time. Cash and bonds offer low income returns. Meanwhile, tax changes to buy-to-let property may also limit your net returns.
As such, FTSE 100 dividend shares could be a worthwhile income investment. Even though dividends are being cut among many sectors in the short run.
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Income opportunities
The Bank of England’s decision to reduce interest rates to support the economy means savings accounts offer below-inflation returns, in many cases. Likewise, the yields available on bonds are relatively low. This could lead to a loss of your spending power over time. You’re also likely to need a significant sum of money just to currently generate a modest level of income.
Similarly, buy-to-let property may be a relatively unappealing place to invest, from an income perspective. Uncertainty surrounding rental growth and tax changes mean your net returns could be disappointing.
As such, FTSE 100 dividend shares may offer the most appealing destination for long-term income investors. At present, the index has a historic dividend yield of around 6%. That figure may not be realised in the short run. That’s due to dividend cuts being announced by many of the index’s members. But, over the long run, income prospects for large-cap shares appear to be more attractive than other mainstream assets.
Recovery potential
As well as a relatively high yield, the FTSE 100 also offers recovery potential. The index’s members are, in many cases, financially sound businesses. Therefore, they’re very likely to survive the current economic crisis. They may even be able to build on their market share to strengthen competitive positions.
This may lead to a return to strong dividend growth across the index. So, while a yield of 6% may not be realised in the current year, investors in FTSE 100 shares could enjoy strong growth in their income over the longer term. This may further widen the gap between FTSE 100 stocks and other assets from an income perspective.
Furthermore, the FTSE 100 has a strong track record of recovery. So income investors may enjoy capital returns on their investments. The index’s valuation suggests it offers a wide margin of safety at present. Also, investors have largely priced in the anticipated economic challenges posed by coronavirus.
The index has a solid track record of recovering from even its very worst bear markets. So it could prove to be a worthwhile place to invest for those individuals who have a long-term time horizon.
