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The 5% dividend-yielding FTSE 100 has slumped 20%! Is now the time to buy back in?

The FTSE 100 is now officially in a bear market. It’s fallen by over 20% from its recent high, which provides evidence of the scale of its recent decline.

Its sharp fall means the index now has a dividend yield of over 5%. This suggests it could offer good value for money. It also suggests it may contain a number of stocks that have margins of safety included in their valuations.

Of course, more pain could be ahead for investors in the short run. But, through buying undervalued, high-quality stocks today, you could improve your long-term financial prospects.

Further challenges

The recent performance of the FTSE 100 highlights the scale of fear that’s currently present among investors. They’re concerned about the near-term impact of coronavirus on the world economy. It’s caused disruption to global supply chains and reduced demand among consumers in affected regions.

As such, should news flow regarding the disease and its impact on the global economic outlook continue to be challenging, it would be unsurprising for the FTSE 100 to fall further. This could mean its period of decline is extended as investors prioritise the return of capital, rather than their return on capital.

High yield

Of course, the FTSE 100 has been in similar situations before. It’s experienced 20%+ declines on a number of occasions since its inception 36 years ago. And investors who’ve been able to maintain a rational standpoint of where the index could be trading in the long run have generally benefitted from buying stocks while they offer wide margins of safety.

Evidence of how cheap the FTSE 100 has become can be seen in its dividend yield. It currently stands at over 5%. There’s scope for a reduction in dividends across many large-cap shares should they experience challenging trading conditions due to the impact of coronavirus.

That said, many FTSE 100 shares have substantial headroom when making their dividend payments. That means they may be able to absorb lower levels of profitability for a limited period without resorting to reducing shareholder payouts.

This could mean investors can obtain a high yield that grows over the coming years. Moreover, the FTSE 100’s low valuation suggests there’s significant recovery potential ahead.

An uncertain future?

Clearly, the near-term prospects for the FTSE 100 are uncertain. But the long-term outlook for the index may still be very positive. The FTSE 100 has experienced a variety of risks and challenges during its existence. They’ve ranged from the 1987 crash to the global financial crisis, and from the tech bubble to previous outbreaks of diseases. Yet, it’s always recovered to post new highs.

There’s no guarantee of the same outcome following the coronavirus outbreak. But the track record of the stock market suggests buying now could prove to be a sound move for long-term investors.

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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.