The FTSE 100 has been a popular destination for income-seeking investors over recent years. That’s because it contains a wide range of dividend stocks.
However, some of its members have decided to cut or postpone their dividends over the last few months, due to uncertain operating conditions. As such, there are fewer income opportunities currently available in the index.
Despite this, the popularity of dividend stocks could increase over the coming years as low interest rates stifle passive income opportunities elsewhere. Combined with the index’s recovery prospects, this could mean dividend shares deliver high total returns in the long run. Especially if purchased in a tax-efficient account, such as an ISA.
FTSE 100 dividend appeal
The FTSE 100 may now contain fewer dividend shares than it did just a few months ago, but it’s still possible to build a diverse portfolio of income shares. Furthermore, many of the index’s members could restart shareholder payouts over the medium term as the economy gradually reopens. This could mean there are an increasing number of stocks that offer attractive dividend yields.
Demand for income stocks could increase significantly over the medium term. Other assets, such as cash and bonds, are unlikely to be as popular over the coming years as they’ve been in the past due to low interest rates. It could mean the returns from even a large amount of capital invested in cash and bonds are limited.
Similarly, the uncertain prospects for the UK economy may mean that buy-to-let yields are somewhat risky. Longer void periods and higher unemployment in the UK may mean the FTSE 100’s international appeal makes it a more attractive means of generating a passive income.
This may mean that demand for large-cap dividend shares increases over the coming years. As such, as well as their income potential, they could deliver strong capital returns as rising demand lifts their share prices.
Recovery potential
The FTSE 100’s recent market crash means that many of its members currently trade at low prices. In some cases they are substantially below their long-term averages. This suggests that they offer significant recovery potential.
The index has always been able to post new record highs following its past bear markets. Although this process can take a number of years, the FTSE 100 has been able to produce annualised total returns of around 8% (including dividends) since its inception in 1984.
Therefore, as well as the income returns offered by dividend shares, they may also benefit from the index’s likely shift from a period of decline to a sustained bull market. This could catalyse your overall returns and increase the size of your portfolio. That may make it easier to generate a passive income from your ISA over the long run.
