The FTSE 100’s market crash could provide an excellent opportunity for income investors to buy undervalued dividend stocks. Certainly, further declines in the index’s price level may be ahead in the near term. But in the long run, dividend growth plus high yields could lead to generous income returns.
Moreover, other mainstream assets such as property, bonds, and cash appear to have unfavourable outlooks. Therefore, now may be the right time to capitalise on the market crash to buy high-yielding FTSE 100 shares.
With interest rates now at an historic low, income-seekers are much more limited than they perhaps ever have been when it comes to generating a return on their capital. Savings accounts and Cash ISAs now generally offer below-inflation income returns. It’s a similar story for investment-grade bonds. This could mean your capital fails to provide a sufficient income to fund your lifestyle while interest rates are low.
Similarly, the returns on buy-to-let properties could prove to be disappointing. Economic challenges facing the UK may limit rental growth. Meanwhile, tax changes over recent years could lead to a lower net return for many landlords.
FTSE 100 dividend stocks may, therefore, offer the most attractive income outlook over the long term. The index’s crash over recent weeks means it now offers a yield of around 6%. This is its highest ever level and, while some dividend cuts have already been announced, there are a number of companies that seem likely to maintain their income payouts in the coming months.
Identifying them could be a worthwhile exercise. To achieve this goal, investors may wish to consider the operating outlook for specific businesses. For example, defensive companies operating in sectors that are relatively unreliant on the prospects for the wider economy may not experience a major fall in their profitability. Likewise, companies with dividends amply covered by profit may not feel the need to reduce their shareholder payouts in response to coronavirus.
Through purchasing lower-risk FTSE 100 companies, you may not receive the highest yields in the index. Investor sentiment towards high-quality defensive companies may be stronger than it is towards riskier cyclical stocks. However, compared to other mainstream assets, obtaining a relatively resilient 4% or 5% dividend yield could be highly attractive.
As well as their income prospects, dividend stocks also offer impressive capital growth potential. The FTSE 100’s recent crash may feel as though it will last forever. But history shows the stock market has always recovered from its various bear markets to post new record highs.
Therefore, it’s possible for you to enjoy a growing portfolio over the coming years through capitalising on the FTSE 100’s recent decline. Doing so could improve your financial prospects in the long run.
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.