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Forget buy-to-let, Cash ISAs and Premium Bonds: I’d buy bargain FTSE 100 dividend stocks

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Many FTSE 100 stocks have cut, delayed or even cancelled their dividends due to the uncertainty facing the world economy. This means that it is more difficult to now obtain a passive income from the FTSE 100.

As such, many investors may decide to seek a passive income from other mainstream assets such as Cash ISAs, Premium Bonds or buy-to-let properties. However, their income returns could prove to be highly unappealing. And the prospect of an improving outlook for the FTSE 100 may lead to rising dividends across the index in the coming years.

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Dividend opportunities

Many FTSE 100 companies have made changes to their dividend policies in light of coronavirus. But some large-cap shares have not. Across sectors such as utilities, tobacco and others, dividend policies are just where they were prior to coronavirus. As such, it is still possible to obtain a worthwhile passive income from large-cap shares in 2020. And you could benefit from the prospect of dividend growth in the coming years.

Income potential

In the long run, the income potential of FTSE 100 shares appears to be far greater than those of other assets. The world economy has always recovered from its very worst recessions to post positive GDP growth. Monetary and fiscal stimulus is likely to be high in the next few years, so the operating conditions for many FTSE 100 companies could improve significantly relative to today. This may allow them to raise dividends at a fast pace.

By contrast, the income returns of Cash ISAs and Premium Bonds are likely to be low. A fall in interest rates to a historic low means that the returns on Cash ISAs and Premium Bonds may fail to keep up with inflation. This could lead to a loss of spending power for their holders.

Meanwhile, buy-to-let properties may become less attractive to income investors. Rental growth could be subdued over the near term. And some tenants may understandably find it difficult to pay their rent given the challenging economic outlook facing the UK. Furthermore, tax changes mean that the net income return available to investors in buy-to-let properties may be lower than it has been over recent years.

Diversification

Through buying a diverse range of financially-sound FTSE 100 shares, you can build a worthwhile income stream for the long run. Diversification reduces company-specific risk. This could strengthen your overall returns and lower the risks facing your portfolio during an uncertain period for the world economy.

Certainly, investing today is a risky move in the short run. Paper losses may be ahead for investors in FTSE 100 shares. But compared to other mainstream assets, the yields and dividend growth potential of FTSE 100 shares make them a relatively attractive means of generating a passive income.

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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.

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