£5k to invest in the stock market crash? I’d buy cheap FTSE 100 dividend shares in an ISA

I think FTSE 100 (INDEXFTSE:UKX) dividend stocks could be undervalued after the recent market crash, which could make today a worthwhile buying opportunity.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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The FTSE 100’s recent market crash means that many dividend stocks currently trade on low valuations. This could mean that they have the capacity to deliver high returns in the long run as the stock market gradually recovers.

Furthermore, FTSE 100 dividend stocks could become increasingly attractive to a wide range of investors. Low interest rates could cause other income-producing assets to lack appeal, which may boost the prices of income stocks.

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As such, now could be the right time to buy a selection of dividend stocks in an ISA with £5,000, or any other amount, for the long run.

Increasing demand

Individuals seeking to make a passive income from their capital have endured a tough period over the past decade. Low interest rates have meant that the returns on cash, bonds and other mainstream income-producing assets have fallen to levels that are significantly below those on offer from the FTSE 100 in many cases.

Looking ahead, interest rates could remain at historic lows for some time. The Bank of England is unlikely to risk hurting a potential economic recovery following coronavirus by raising interest rates. This could mean that it maintains low interest rates over the medium term.

Income-seekers who are unable to make a worthwhile passive income from cash and bonds may, therefore, switch their attention to FTSE 100 dividend stocks. Such companies offer greater resilience than smaller businesses due to their size and scale in many cases, and may be viewed as being relatively low risk compared to other listed companies.

With yields on offer across the FTSE 100 being relatively high following its recent market crash, the difference in income return between large-cap dividend stocks and other income-producing assets is relatively wide at the present time. This could lead to high demand for large-cap income shares that pushes their prices upwards over the coming years.

FTSE 100 recovery potential

As well as rising demand among investors for their income returns, FTSE 100 dividend stocks may also benefit from improving investor sentiment towards the wider stock market. Although investors are generally uncertain about the future for the economy at the present time, this feeling is likely to give way to optimism about the prospects for the stock market.

Investor sentiment has always recovered following stock market downturns. This has enabled the index to deliver new record highs after every one of its previous bear markets. While such an outcome may seem unlikely right now due to the uncertainty facing the UK economy, investors with a long-term time horizon could access the index’s turnaround potential over the coming years.

As such, now could be the right time to buy a range of FTSE 100 dividend stocks in an ISA while they offer wide margins of safety. They could offer tax-efficient gains over the coming years, as well as strong income growth.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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