It’s a difficult time for investors seeking to make an income from their capital. The FTSE 100 has crashed, and some of its members have already announced dividend cuts or postponements.
Meanwhile, interest rates have fallen. Cash savings and bonds now offer relatively disappointing income returns.
However, there could be many opportunities to generate a passive income from high-quality FTSE 100 stocks. If you buy companies with solid balance sheets and affordable dividends, you may be able to build a growing income stream via a tax-efficient account such as an ISA.
The FTSE 100’s dividend yield has spiked to over 6%, its highest on record. This suggests investors may be expecting dividends to be cut at a sizeable number of the index’s constituents.
One way investors can potentially overcome this threat is to buy stocks with highly affordable dividends and defensive business models. A company whose net profit covers its dividend payments many times over may be less likely to reduce its dividends. That is even if its profitability comes under severe pressure in the near term.
Likewise, a business with defensive characteristics may not experience a marked drop in its profitability. This may make a dividend cut less likely. And companies such as those operating in the healthcare and utility sectors are obvious examples.
Moreover, buying businesses with solid balance sheets and sensible growth strategies could be a sound move. They may even be able to grow their dividends, rather than reduce them.
Since the FTSE 100 currently has a generous yield, its relative appeal seems to be high for income investors. As mentioned, interest rates have fallen to their lowest ever level. Their prospect of rising rapidly over the coming years now seems to be limited. That is because the Bank of England may wish to provide support to any upcoming economic recovery. This may mean that bonds and cash fail to offer income returns that can keep pace with inflation. And your spending power would be reduced as a result.
Similarly, the appeal of buy-to-let investment may be relatively low at the present time. Tax changes, affordability issues and concerns about the prospects for the economy may weigh on income returns across the sector.
As such, with the FTSE 100 having a strong track record of recovery, it could offer the most appealing income investing opportunity among mainstream assets. The cost of buying a diverse range of shares has fallen in recent years, which could make it easier for more investors to build an income portfolio.
Doing so may not produce stunning returns in the short run should the market crash continue. But over the long run it could be the most attractive means of generating a passive income from your capital.
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.