Investing £10k in the FTSE 100 today may seem to be an unwise move to many investors. After all, the world economy faces a period of significant uncertainty due to threats such as the ongoing trade dispute between the US and China, as well as Brexit. Both of these risks could lead to declining investor sentiment that ultimately produces a challenging period for the index over the coming months.
However, history shows that uncertain periods for the FTSE 100 can produce the most appealing buying opportunities. With dividend shares having the potential to remain relatively popular in a low interest rate environment and a Stocks and Shares ISA providing tax efficiency, buying large-cap income shares could prove to be a shrewd move in the long run.
Buying on uncertainty
While it is impossible to know how major risks such as the global trade war and Brexit will proceed, investors can determine whether FTSE 100 stocks currently offer good value for money. Since the FTSE 100 currently has a dividend yield of around 4.3%, it seems to offer a wide margin of safety that suggests investors have priced in the risks facing the world economy.
In fact, there are a number of large-cap stocks which offer exceptionally low price-to-earnings ratios at the present time. This is despite many of them being forecast to produce improving financial performances in the current year and beyond, while having sound strategies and robust balance sheets. As such, it could be argued that buying them now is a sound move from a risk/reward perspective.
Clearly, a downturn for the global economy could produce disappointing share price performances in the short run. But, as previous economic challenges have shown, buying undervalued stocks now for the long term can prove to be a highly profitable strategy.
The FTSE 100’s yield suggests that it offers an appealing income investing opportunity. In fact, its yield is relatively high compared to its historic range, which indicates that income investors may be able to overcome disappointing returns on cash, bonds and other assets through purchasing dividend-paying stocks.
As well as a high yield, dividend shares offer the potential for rising shareholder payouts over the medium term. This could lead to rising demand for them from a wide range of investors, which may produce improving capital returns. Dividend shares may also be viewed as more defensive than their growth counterparts, which could help them to overcome the potential volatility that may be ahead for the FTSE 100.
Stocks and Shares ISA
Buying FTSE 100 dividend shares in a Stocks and Shares ISA is a simple, yet highly logical, move for any investor. Doing so could save you significant sums of money in the long run through avoiding dividend tax and capital gains tax. With Stocks and Shares ISAs being simple and cheap to open, now could be the right time to buy FTSE 100 dividend shares through them for the long run.
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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.