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Is now a good time to invest in cheap FTSE 100 dividend stocks?

Buying FTSE 100 dividend shares today may seem to be an illogical move. After all, the index has fallen heavily in recent weeks and could realistically experience further declines in the short run.

However, the valuations on offer across the FTSE 100 suggest that investors have factored in the potential risks facing the world economy. The index has always recovered from bear markets in the past. That means it could deliver a successful turnaround in the coming years.

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As such, now may be the right time to buy a diverse range of income shares and hold them for the long run.

Valuations

The FTSE 100’s dividend yield currently stands at around 6%. For any investor who has been trying to generate a passive income from their capital over recent years, this figure is likely to be attractive. In fact, it is currently at its highest level since the index’s inception. It only came close during the global financial crisis.

Dividends could be cut by companies across the FTSE 100. But the index’s high yield suggests that investors are pricing-in a significant amount of disruption to the world’s economy. This could mean that investors are now able to buy high-quality businesses while they trade on exceptionally low valuations in many cases. Over time, they could deliver recoveries that equal high returns for their investors.

Recovery potential

The chances of a FTSE 100 recovery may seem to be slim at the present time. The number of coronavirus cases across the world is, sadly, continuing to rise. Many industries will suffer negative effects from government policies. Restricting free movement is bad for business so the near-term outlook for many companies is challenging.

However, the world economy has faced challenges in its past that have negatively impacted on its outlook. The financial crisis is a notable example, when several major UK banks were essentially insolvent. This led to a run on the banks, as well as extremely low consumer confidence. Even though a recovery seemed unlikely and did take several years, the index went on to make a new record high.

Therefore, even though the recovery from this coronavirus is likely to be a relatively slow process, long-term investors who buy stocks now could generate high returns in the coming years.

Time horizon

Of course, all of the above discussion focuses on the long-term prospects for the FTSE 100. On that basis, now could prove to be an excellent time to invest.

Clearly, over the short run there is scope for the index’s price level to move lower. But, if you are able to overlook paper losses in the coming months and focus on the recovery prospects for your portfolio, buying shares today could have a very positive impact on your financial future.

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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.