Investors have hurried to sell FTSE 100 dividend stocks in the recent market crash.
Unfortunately, many former blue-chip income stocks have rushed to cut their dividends over the past few weeks. This has significantly reduced the appeal of these investments.
However, I’m still buying these blue-chip income stocks despite the cuts. The long-term income prospects of these businesses remain highly attractive.
FTSE 100 dividend stocks
Estimates vary, but the total overall reduction in FTSE 100 dividends this year is going to be around 50%. That is not very reassuring for income investors, but from a long term perspective, this seems like a good trade-off.
Many FTSE 100 dividend stocks are suffering significantly from the current virus crisis. Some firms have seen revenues drop by more than 50%. Paying out a dividend when sales have dropped by 50% doesn’t make much sense. The company may have to borrow to fund the payout. That will weaken the balance sheet, and could lead to other problems further down the line.
Therefore, suspending the dividend seems to be the best course of action. When the crisis is over, these companies can re-evaluate the situation. If the economy bounces back, they can reinstate the payout at the previous level.
If there’s no bounce-back, the payouts from these FTSE 100 dividend stocks may still return, albeit at a lower level.
All in all, while the recent number of dividend cuts is disappointing, it is for the best. By keeping cash on the balance sheet, these companies should be able to weather the storm and could come out stronger on the other side.
That’s why I’m buying bargain FTSE 100 dividend stocks for my ISA today.
Some of these businesses have suspended their dividends. But their track record of returning cash to investors suggests that when the crisis is over, their managements will restore the payouts.
FTSE 100 dividend stocks on my list include insurance giants Direct Line and RSA. Retailer Next also has a solid track record of returning excess cash to investors. And when the crisis is over, I expect banking giant HSBC will restore its dividend. The global bank is already under immense pressure from shareholders around the world to do just that.
Long term returns
Therefore, while it might be a few months before shareholders see any income from these FTSE 100 dividend stocks, now could be a great time to buy the businesses for the long term.
Indeed, the current crisis won’t last forever. Over the past three decades, the FTSE 100 has experienced a range of severe economic shocks. Every time the index has come back stronger.
It is highly likely the same will happen this time around. That’s why long-term investors could be well rewarded buying beaten-down FTSE 100 dividend stocks at current levels.
The outlook for these stocks is uncertain in the near term, but in the long run, history suggests they could produce attractive income returns.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.