The FTSE 100’s crash has caused the index’s dividend yield to spike to its highest ever level of around 6%. But there is a problem facing investors. Many of the index’s members either have, or are likely to, cut their dividend payments in response to an uncertain economic outlook.
As such, making a passive income may be relatively challenging in the short run. In the long term though, there appear to be numerous opportunities to benefit from the FTSE 100’s recent crash. That is because many dividend stocks trade on attractive valuations and offer recovery potential. Investing £10k, or any other amount, in them could yield an appealing passive income.
Short term/long term
In the short run, a number of FTSE 100 companies are unlikely to reduce their dividends by a significant amount. They include defensive stocks for which an economic downturn should not have a significant impact on their financial performance. True, they may not be among the highest yields on offer. But companies operating across the utility sector and in sectors like tobacco are likely to produce high income returns in the coming months.
Over the long term, the economy’s track record suggests that a recession is unlikely to last in perpetuity. Moreover, the economy has successfully moved from recession to a period of positive growth following every previous downturn.
This could mean FTSE 100 dividend stocks that have cut their dividends in recent weeks go on to reinstate them. And they could offer strong dividend growth in the long run. Their prices trade at low levels today, in many cases at levels not been since the last global recession. So there could be buying opportunities for investors who do not require a passive income in the short run.
Of course, buying a small number of FTSE 100 shares to generate a passive income is not a good idea even during more benign market conditions. Building a portfolio containing a diverse range of stocks that operate in different industries and regions is likely to reduce your overall risks. This can also enhance your dividend growth opportunities in the long run.
Furthermore, purchasing the market leaders in a specific industry could be a means of successfully navigating the economic challenges that may be ahead. Companies with dominant market positions may have wider economic moats that increase their chances of survival. They may even be able to extend their market share to strengthen their potential to raise shareholder payouts in the coming years.
Investing in FTSE 100 shares today for a passive income is likely to be a more volatile experience than holding cash, bonds or other income-producing mainstream assets. However, the FTSE 100’s crash means that many dividend stocks now offer excellent value for money. That means they could provide an attractive passive income in the long run.
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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.