The FTSE 100’s recent market crash means many of its members now have relatively high dividend yields. Of course, a number of them have already cut, postponed, or even cancelled shareholder payouts for the current year. As such, buying FTSE 100 dividend stocks may not seem to be a sound idea at present.
However, over the long run, they could offer recovery potential due to their low valuations. Furthermore, their dividend prospects could improve as the world economy recovers from its current challenges. This could improve your portfolio’s returns, and help you to retire early.
Recovery prospects
In the short run, FTSE 100 dividend stocks could experience further price declines. News flow regarding coronavirus is incredibly difficult, if not impossible, to accurately predict. As such, investor sentiment may rapidly change over the coming weeks. This may cause investors to experience paper losses from their holdings.
However, the valuations of many FTSE 100 stocks suggest investors have priced in a substantial amount of economic challenges in the coming months. Since many investors who are planning for retirement have a long time horizon, there’s scope to buy undervalued FTSE 100 shares and benefit from their subsequent recovery. Ok, a return to their previous highs isn’t guaranteed. But the FTSE 100’s track record of recording higher highs following each of its past bear markets suggests this is a likely outcome.
Income potential
Since a large portion of the FTSE 100’s past total returns have been derived from the reinvestment of dividends, reductions in shareholder payouts could harm near-term total returns.
However, the fiscal and monetary policy response to coronavirus has already been significant. For example, interest rates in a range of countries have been cut. Also, governments across the world are providing loans and even grants to businesses to help them survive economic challenges.
This could mean many businesses are able to quickly recover from the difficulties presented by coronavirus. They may, therefore, be able to resume dividend payments at a very similar level to where they’ve been in recent months. This could boost your income return. It could also strengthen your total returns in the long run.
Cyclicality
The FTSE 100 doesn’t experience bear markets frequently. Historically, they’ve occurred every 5-15 years. Investors who buy stocks during them have the opportunity to make high total returns. That’s because high-quality stocks trading at low prices experience strong recoveries in the following years.
Such an outcome this time isn’t guaranteed. But it seems likely high-quality FTSE 100 dividend stocks will experience improving operating conditions in the long run. As such, now could be one of the relatively few exceptional buying opportunities for FTSE 100 investors.
At its current price level, the index could help you to build a larger nest egg… and retire early.
