Why I’d buy bargain FTSE 100 shares in this stock market crash to make a passive income

The FTSE 100 (INDEXFTSE:UKX) could offer passive income opportunities after its crash, in my view.

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The FTSE 100’s market crash has caused a number of stocks to now offer wide margins of safety. Their prices have fallen to exceptionally low levels that, in many cases, would prompt income investors to buy them for the long run.

However, the problem is that many FTSE 100 companies have decided to delay, reduce, or even cancel their dividends. This could mean income investors experience a relatively challenging near-term outlook. And that comes at a time when other assets also offer low returns.

But, by focusing on companies with solid financial situations and those businesses that are currently not being impacted financially by coronavirus, you could obtain a generous passive income in the long run.

Income prospects

Investors who require an income from their capital may wish to focus on companies not currently experiencing financial challenges. An increasing number of FTSE 100 companies are likely to report a drop in sales. And this could hurt their near-term dividend prospects. But some of the index’s members could also continue to operate as usual.

This could mean investors need to delve further into a company’s financial standing before buying it. Likewise, they may wish to consider recent updates. These will determine the prospect of dividends being cut.

However, it’s still possible to build an income portfolio containing a diverse range of businesses that offer relatively high income returns.

Furthermore, some FTSE 100 companies that have delayed dividends appear to have done so due to an increased level of caution. In other words, they’re not experiencing financial difficulties from coronavirus. Instead, they’ve decided to suspend dividend payments to ensure financial stability. In such cases, a return to dividend payments could take place as the economy begins to recover.

Bargain buys

As well as the prospect of a generous income return relative to other assets, such as cash and bonds, the FTSE 100 offers impressive capital growth potential. The past performance of the index shows it has a history of cyclicality. Its bull markets have never lasted in perpetuity. Indeed, they’ve been punctuated by several major bear markets since the index’s inception in 1984.

Buying during any of the FTSE 100’s bear markets would have probably been seen as a wrong move at the time. After all, the prospects for the world economy in 1987 and in 2009 were especially downbeat.

However, the economy and the stock market ultimately went on to post strong recoveries. The same outcome may seem unlikely at present. But, in the long run, there’s likely to be a return to high total returns across the FTSE 100.

Therefore, income investors may be able to benefit from the recovery prospects of the FTSE 100. Through buying financially-sound businesses that offer solid dividends, you can boost your passive income and improve your long-term financial outlook.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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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