Buying FTSE 100 dividend shares may seem to be a rather obvious investment strategy, but it could lead to high returns in the long run.
The future prospects for other mainstream assets such as cash, bonds and property appears to be challenging. Meanwhile, the income returns and valuations available within the FTSE 100 could be highly appealing.
As such, now could be the right time to buy a range of FTSE 100 income shares at a time when the index itself appears to offer a wide margin of safety.
Over the course of the next few years, interest rates are expected to follow a modest growth path. This means that investors who are hoping to generate inflation-beating returns on cash, or buy bonds with higher yields, may be disappointed.
In fact, the best returns available on Cash ISAs at the present time are around 1.5%. Investment grade bonds, meanwhile, may fail to offer an above-inflation return.
Similarly, the prospects for buy-to-let investors seem to be challenging. Changes to tax rules, such as an additional 3% stamp duty on second homes, may make the sector less attractive from an investment perspective. Furthermore, after a decade of house price growth, the yields available on property in the UK are relatively low when compared to their historic levels.
Total return potential
By contrast, the FTSE 100 offers a relatively high yield when compared to its historic levels. It currently yields over 4%, while many of its members have higher income returns available in the current year. This may allow investors to obtain a portfolio yield that is significantly higher than 4%, which could allow them to significantly beat inflation.
The FTSE 100’s 4%+ yield also indicates that it offers capital growth potential. Even though it has enjoyed a decade-long bull market, many of the index’s members appear to offer wide margins of safety. This may allow the index to rise significantly over the long run, with the international focus of many of its members providing investors with access to fast-growing economies across the world. This may be especially relevant given the ongoing risks facing the UK from an economic and political perspective.
The ease of buying FTSE 100 shares has increased in recent years. It is possible to open a Stocks and Shares ISA online in a matter of minutes, for example. This contrasts with other mainstream assets, such as property, that require far more effort on the part of the investor.
Likewise, FTSE 100 stocks offer a high level of liquidity that is not always present in other assets such as bonds and property. This helps to reduce the risk of large-cap shares, and could mean that they offer a compelling risk/reward ratio for the long run. Alongside their low valuations and scope to beat other mainstream assets, a more favourable shareholder experience could make them highly attractive at the present time.
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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.