The FTSE 100 has fallen by over 30% since the start of the year. Many of its members now offer high income returns that are well in excess of the index’s exceptionally high 6.5% dividend yield.
In the short run, dividend growth may be paused. There is even scope for dividend cuts across the index if the economic impact of coronavirus is severe. But with wide margins of safety and long-term recovery potential, now could be the right time to buy undervalued income shares.
With that in mind, these two FTSE 100 dividend shares could offer investment appeal at the present time. They may boost your passive income in the coming years.
The outlook for UK banks such as Lloyds (LSE: LLOY) has deteriorated significantly over the past month. We are seeing lower levels of economic activity, weak business confidence and lower interest rates. And that mean the bank’s profitability is likely to be negatively impacted by coronavirus.
As such, it would be unsurprising for its dividend to come under pressure. It was due to be covered 1.9 times by net profit this year. But a fall in the firm’s profit growth rate could lead to far less headroom than was previously anticipated.
Lloyds may, therefore, decide to pay a lower dividend than was previously expected. However, investors seem to have priced-in this prospect due to the bank’s forward yield now standing at over 10%. Dividends may be cut (which is not guaranteed), but the bank could continue to offer a relatively attractive passive income even if they are.
Alongside this, it has a strong balance sheet and relative efficiency. That could mean it improves its market position to deliver higher levels of profitability over the long run.
Another FTSE 100 stock that could offer long-term dividend appeal is BP (LSE: BP). As with most of the oil & gas sector, its shares have come under significant pressure of late. The tumbling oil price likely to mean severe downgrades in its guidance over the near term.
This may negatively impact on the company’s dividend prospects. However, as with many FTSE 100 stocks, investors appear to have factored in the potential for reduced dividends due to the impact of coronavirus on the world economy.
For example, BP now has a dividend yield of 12%. It also trades on a relatively low valuation, with its price-to-earnings (P/E) ratio standing at just 7. It may, therefore, offer value investing appeal. This is due to the strength of its asset base and the prospect of a long-term recovery in oil and gas prices over the coming years.
Of course, the outlook for companies such as BP could deteriorate further. That is especially so of the impact of coronavirus on the world economy prove to be very negative. But it has wide margins of safety and a track record of recovery. That means buying high-quality FTSE 100 shares such as BP could prove to be a sound move over the long run.
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Peter Stephens owns shares of BP and Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.