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How high does the FTSE 100’s dividend yield have to go before you buy it?

At the time of writing, the FTSE 100 has a dividend yield of around 4.5%. That’s relatively high for the index when compared not only to its historic range, but also to other asset classes such as property, bonds and cash.

As such, now could be the right time to buy FTSE 100 stocks that offer impressive income outlooks. With a number of large-cap shares being well-placed to deliver rising profitability and shareholder payouts, the prospects for long-term income investors may be the most attractive they have been for a number of years.

High yields

The FTSE 100’s dividend yield has rarely been as high as it is at the present time. Only during periods of high uncertainty, such as when the financial crisis was in full swing, has the index offered a better income return. And while the index and the world economy face an uncertain future due to risks such as the US/China trade war, the reality is that the world is not facing a financial crisis at the present time. Therefore, the chances of dividends being slashed across FTSE 100 members seems to be relatively low.

The FTSE 100’s high yield also indicates that it offers good value for money. Despite having doubled in the last decade, it continues to trade only around 5% higher than it did in 1999. Given that many of its members have been able to record increasing profitability during that time, it could be argued that the index is cheap.

Relative appeal

When compared to other mainstream assets such as cash, bonds and property, the FTSE 100’s yield is highly appealing. For example, it is difficult to obtain a return on cash or investment-grade bonds that is significantly higher than inflation. While property may offer a greater gross return than 4.5% in some, although not all, parts of the country, this is often reduced significantly by tax, management fees, void periods and other costs. By contrast, FTSE 100 shares can be purchased through an ISA that means there is no tax to pay on any income or gains.

Even when compared to other major indices, the FTSE 100 appears to offer an impressive income return. The S&P 500, for example, has a dividend yield that is less than half that of the UK’s main index. This could indicate that the FTSE 100 has significant growth opportunities over the long run – especially as the world economy is forecast to grow at a brisk pace over the coming years.

Diverse opportunity

With the FTSE 100 offering a varied range of stocks that operate in a number of different geographies, it is possible to build a well-diversified portfolio in a short space of time. Since those same stocks appear to be undervalued, as well as offering a high income return, now could be the right time to buy and hold a range of them for the long term.

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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.