Buying FTSE 100 stocks today may not seem to be a worthwhile move at first glance. After all, the index faces a highly uncertain period, while many of its members have cut their dividends.
However, over the long run, FTSE 100 stocks could offer strong recovery potential following the recent market crash. Their total returns may prove to be relatively high, which could mean that now is the right time to build a portfolio of large-cap shares.
At the present time, it’s exceptionally difficult to obtain an above-inflation income return on your capital. Assets, such as cash and bonds, offer low income returns due to interest rates being at their lowest level in history. Likewise, buy-to-let property may struggle to produce impressive income returns. This is due to adverse tax changes as well as a more challenging mortgage market.
Although many FTSE 100 shares have postponed or cancelled their dividends, they could resume them over the medium term, in many cases.
For example, a large proportion of FTSE 100 companies have solid balance sheets. This could make shareholder payouts relatively affordable over the long run. Furthermore, since the world economy has always recovered from its recessions and depressions, there’s a high chance more favourable operating conditions will return for FTSE 100 companies. This may enable them to return to paying rising dividends in future.
Capital growth potential
As well as their long-term income appeal, FTSE 100 shares offer strong capital growth potential. Certainly, the index may fail to fully recovery from its recent crash over a matter of months. But its track record shows it’s very likely to experience a rebound after its recent lows. It has always achieved this feat – even after the very worst bear markets that have taken place since its inception.
Furthermore, FTSE 100 stocks could become highly popular among income-seeking investors as their dividends return in the coming years. As mentioned, the income on other mainstream assets may prove to be highly disappointing over the medium term. Therefore, as shareholder payouts start to return to FTSE 100 stocks, they may experience higher demand from investors that pushes their share prices higher.
Buying a diverse range of FTSE 100 companies could limit your risks and boost your overall returns. A diverse portfolio is less reliant on a small number of companies for its returns, which could allow you to capitalise on the FTSE 100’s recovery potential over the coming years.
Although there may not be a quick rebound in the FTSE 100’s price level, the valuations of its members suggest now is a worthwhile buying opportunity. They could offer a potent mix of capital growth and income potential that helps them to significantly outperform other mainstream assets 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.