The FTSE 100’s recent market crash could make the idea of buying dividend shares less appealing to many people. There is the prospect of further declines ahead as the full impact of coronavirus on the world economy becomes evident. As such, many investors may decide to hold less risky assets that have a lower chance of losing money.
However, dividend shares offer a higher income return than most assets. They have recovery potential, and may be more resilient than many investors realise over the long term. Therefore, now could be the right time to buy them – even as the stock market crashes.
The recent emergency cut in interest rates means that the appeal of savings accounts and Cash ISAs is likely to continue to fall in the medium term. Previously, it was difficult to obtain an inflation-beating return from them. Now that task may become even more challenging.
By contrast, FTSE 100 dividend shares offer significantly higher income returns – especially after the market crash. The index itself yields around 5%. But it is possible to obtain an even higher income return through buying a diverse range of income shares. When undertaken through a Stocks and Shares ISA, your dividend income is tax-free.
This could further increase the appeal of buying FTSE 100 dividend shares, with many companies having a large amount of headroom when making shareholder payouts.
Dividend shares offer the prospect of capital returns in the long run through a successful recovery. The FTSE 100 has always delivered a successful turnaround following its past bear markets. While this has taken a number of years in some cases, ultimately investors who have a long-term outlook are likely to be rewarded through the index posting new record highs.
Although obtaining capital growth may not be your priority, a larger portfolio has the potential to make it easier to generate a strong income return. As such, benefitting from a subsequent recovery in the FTSE 100’s price level may improve your long-term income outlook.
At the present time, many companies may fail to grow their dividends in 2020. The negative impact that coronavirus looks set to have on global growth could mean they adopt a cautious stance when it comes to raising shareholder payouts.
However in the long run, the prospect of rising dividends across the FTSE 100 seems to be high. Many sectors, such as technology, retail and healthcare could enjoy bright futures as emerging economies continue to drive global GDP upwards.
Therefore, buying shares in companies with impressive long-term growth outlooks and affordable dividends could be a means of obtaining an inflation-beating income over the coming years. There may be uncertainty ahead in the short run, but FTSE 100 dividend shares could substantially outperform other assets and boost your income prospects in 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.