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FTSE 100 crash: 3 reasons why I’d buy dividend stocks in an ISA today

Buying FTSE 100 dividend stocks after the market crash could be a worthwhile long-term decision for income-seeking investors. Certainly, many of the index’s members have reduced, or even cancelled, their dividend payments.

But a number of large-cap shares could produce a higher income return in 2020 than other mainstream assets.

Furthermore, FTSE 100 income stocks could deliver dividend growth in the coming years. They may also produce higher net returns than other asset classes when purchased through a Stocks and Shares ISA.

Income returns

The world economy is facing a highly uncertain future. So it’s perhaps unsurprising many FTSE 100 companies have changed their dividend policies. This trend was seen in the financial crisis, and in previous recessions. It’s a normal response from companies suddenly faced with challenging operating conditions.

However, not all FTSE 100 companies are experiencing financial disruption from coronavirus. Therefore, it may still be possible to purchase a range of stocks that offer higher yields than other mainstream assets.

For example, cash and bonds are set to yield less than inflation in many cases. Meanwhile, it could be possible to obtain a much higher income return from a basket of FTSE 100 stocks.

FTSE 100 dividend growth

The potential for dividend growth across the FTSE 100 is limited in the short run, of course. And those companies that maintain their dividends during what appears to be a likely recession, may adopt a cautious stance towards raising their shareholder payouts.

However, over the long run, dividend growth seems highly likely. The world economy has always recovered from its various recessions and downturns to post positive GDP growth. Central banks and governments across the world have already announced major stimulus policies, so the economic outlook could improve over the coming years.

This may boost the profitability of FTSE 100 companies and allow them to pay rising dividends that beat inflation. At a time when interest rates are set to remain low, this could make FTSE 100 shares even more appealing. Certainly more than other interest-producing assets such as cash and bonds.

Net returns

Investing in FTSE 100 shares through a Stocks and Shares ISA offers a significant amount of tax efficiency. No tax is charged on amounts invested within an ISA. This could make FTSE 100 income shares more attractive than assets such as a buy-to-let property. Here, recent tax changes mean the net return available to landlords may be substantially below their gross return.

Over the long run, avoiding unnecessary taxes on dividends and capital growth could lead to significantly higher returns for investors.

Stocks and Shares ISAs are simple and cost-effective to open. I think now could be the right time to buy a range of FTSE 100 dividend shares. They could help you generate a relatively high and rising passive income over 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.