The FTSE 100’s recent crash is likely to have caused many investors to adopt a relatively cautious approach to their portfolios. After all, the index has fallen by around 30% since the start of the year. And many investors will have experienced fairly dramatic paper losses.
However, now may be the right time to buy stocks, rather than sell them. The FTSE 100 seems to offer excellent value for money, high yields and long-term recovery prospects. As such, buying dividend stocks today and holding them for the next decade could lead to high returns.
The FTSE 100 already had a relatively high dividend yield prior to its recent crash. As such, it now has a yield in excess of 6%. That’s the highest level in its history, and shows that investors can obtain a passive income from the index that is far in excess of that offered by other mainstream assets at the present time.
Of course, there is the potential for dividend cuts across the index. Many sectors are currently experiencing a severe decline in demand for their products and services. Should this persist, the FTSE 100’s dividend payout may fall. However, in many cases, FTSE 100 stocks have significant headroom when making their dividend payments. This may make wholesale dividend cuts relatively unlikely. Therefore, investors could continue to receive a high income return from the index in the long run which boosts their overall returns.
Capital growth prospects
As well as its income potential, the FTSE 100 offers capital growth prospects over the coming years. Its high yield suggests that the index is undervalued at the present time. Investors may, therefore, be able to purchase high-quality businesses while they trade at low prices. The track record of the index suggests that this strategy can lead to high returns, since the FTSE 100 has always recovered from its bear markets to post new record highs.
Furthermore, the amount of monetary and fiscal policy change which has taken place since the threat from coronavirus emerged has been substantial. Interest rates are at historic lows, while quantitative easing has historically had a positive impact on asset prices. Therefore, buying stocks today and aiming to hold them for the next decade could lead to significant growth for your portfolio.
Clearly, there is scope for further paper losses from FTSE 100 dividend stocks in the near term. The situation involving coronavirus is impossible to accurately predict.
But investors who are able to look beyond the next few months and instead focus on the next decade could take advantage of the FTSE 100’s recent decline. Buying a diverse range of high-quality dividend shares seems to be a simple and logical means of approaching what could be the best buying opportunity in a decade.
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.