Buying cheap FTSE 100 dividend stocks after the recent market crash may not seem to be a sound move in order to generate a passive income. After all, the economic prospects for the UK are highly uncertain, and this could cause more companies to delay or cancel their dividend payouts.
However, on a relative basis the FTSE 100 seems to offer strong income investing potential. Therefore, buying a range of dividend stocks today while they trade at bargain prices could prove to be a profitable move for income-seeking investors over the long run.
Many FTSE 100 stocks have cut their dividends in response to uncertain trading conditions. But a number of companies have been largely unaffected by coronavirus so far. They include businesses operating in sectors such as utilities, healthcare, consumer goods and a number of other industries. As such, they are expected to maintain their dividend plans for the current year.
This could mean that investors are able to generate significantly higher income returns from FTSE 100 dividend shares than from other mainstream assets. For example, a number of FTSE 100 stocks continue to yield in excess of 4%. By contrast, obtaining an income return of even half that figure from assets such as cash and investment-grade bonds has become highly challenging.
FTSE 100 dividend growth
As well as offering relatively high yields at the present time, FTSE 100 dividend shares also offer the potential for dividend growth in many cases. For example, a number of utility companies could deliver dividend growth that matches inflation over the medium term. Meanwhile, demand for some consumer goods and healthcare products could rise over the coming years. This may catalyse the profitability and dividends of companies operating in those sectors.
Therefore, the appeal of dividend shares may be much greater than simply being able to obtain a high yield. They may deliver a growing passive income over the long run that makes them even more attractive on a relative basis.
Capital growth potential
The prospects for FTSE 100 stocks may be uncertain at the present time as a result of a weak outlook for the world economy. However, the global economy has always recovered from its challenging periods to post positive GDP growth. As such, trading conditions across many industries are likely to improve over time.
This could mean that as well as a generous passive income, FTSE 100 shares also produce capital growth in the long run. Although capital growth may not be a primary concern for income investors, a larger portfolio may make it easier to generate a sufficient passive income. So I’d buy large-cap shares when they offer wide margins of safety following the recent market crash. It means you may be able to obtain a large total return that improves your long-term financial prospects.
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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.