The FTSE 100’s recent crash could mean there are numerous cheap dividend stocks available at the present time. Yes, they may experience significant uncertainty in the short run. But over the long term they could deliver strong recoveries and high total returns.
As such, now could be the right time to buy financially-sound income shares for the long run. They could boost your financial prospects and increase your chances of retiring early.
The uncertain outlook for the economy means that many FTSE 100 stocks have reduced or postponed their dividends. However, there are still a number of FTSE 100 companies that are set to maintain their dividends as planned in the current year. Furthermore, many of those companies that have postponed their dividends are likely to reinstate them over the medium term due to them having sound financial positions that make their shareholder payouts relatively affordable.
Buying dividend stocks while the short-term prospects for the economy are uncertain could be a profitable move. Their yields are high and significantly above their long-term historic average in many cases. This may mean that they offer strong total return potential, as well as a generous income, since a large portion of the FTSE 100’s historic returns have been derived from the reinvestment of dividends.
Margin of safety
FTSE 100 dividend stocks may also offer wide margins of safety at the present time. Investor sentiment towards the stock market is currently weak, which means that many shares are trading below their intrinsic values. This may provide investors with greater capital growth potential over the long run.
Furthermore, demand for dividend stocks may increase as low interest rates make other income-producing assets unappealing. Assets such as cash and investment-grade bonds may previously have been used by investors to generate a passive income, but are unlikely to provide a worthwhile income over the medium term. Income-seekers may, therefore, apportion a larger chunk of their capital to dividend stocks to access an inflation-beating return.
The FTSE 100 may have experienced a rally in recent weeks following its market crash. This may be the start of an extended bull run, or could be followed by a return to a downward trend in the short run.
Over the long term, however, the prospects for the FTSE 100 appear to be highly attractive. It currently trades at a relatively low level compared to its historic high, and its track record suggests that a recovery from even a prolonged and painful bear market is highly likely over the coming years.
Therefore, now could be the right time to buy financially-sound income shares for the long run. They may produce impressive total returns that make it easier for you to build a large nest egg to retire early.
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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.