The appeal of holding FTSE 100 income shares appears to be high at present. Around a quarter of the index’s members currently yield over 5%, which means investors may be able to build an income return from their portfolio that easily beats inflation.
In addition, the relative return of FTSE 100 shares looks set to be significantly higher than for other mainstream income-producing assets over the coming years. Low interest rates and regulatory changes may mean that assets such as cash, bonds and property struggle to deliver impressive returns.
Therefore, buying and holding income stocks could be a worthwhile move within a tax-efficient account such as a Stocks and Shares ISA.
Income potential
Generating a high income return from the FTSE 100 could prove to be highly attractive. The index itself offers a dividend yield which is more than twice the rate of inflation, while investors may be able to capitalise on weak investor sentiment to buy undervalued shares.
Risks such as a global trade war, Brexit and weak economic performance across the eurozone may mean many FTSE 100 shares trade on low valuations in many cases. Investor sentiment has remained relatively weak over recent months, which has pushed the yields of many large-cap shares higher. As such, an investor may be able to obtain a diverse portfolio filled with companies that together have an income return of over 5%, or even 6%, in the coming year.
Relative returns
By contrast, the income returns on other mainstream assets, such as bonds and cash, could prove to be less favourable than FTSE 100 shares. Interest rates are currently at historic lows, with it being difficult for many income-producing assets to offer an above-inflation income return. Furthermore, interest rates are expected to remain at relatively low levels over the coming years, as the Bank of England seeks to offer a supportive monetary policy during a period of political and economic change for the UK.
In addition, the net returns on buy-to-let investments may prove to be disappointing. Changes to the taxation of second homes means a large proportion of an investor’s gross return may be deducted before their net return. And with house prices having moved higher over the last decade in many parts of the UK, the gross yields on offer may themselves be relatively unattractive.
Long-term potential
As such, buying a range of FTSE 100 dividend shares and holding them for the long term could be a shrewd move at the present time. They may offer higher yields than other mainstream assets, as well as strong growth potential over the long run that boosts their income returns. When purchased within a Stocks and Shares ISA they could offer favourable net returns that improve your financial outlook over the coming years.
