The Motley Fool

Forget the Cash ISA! I’d buy cheap FTSE 100 income shares to retire on

The recent decline in the stock market may convince some investors that buying FTSE 100 income shares for a retirement portfolio is too risky.

Indeed, many companies have cut or cancelled their dividends in response to the uncertain outlook facing the world economy.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

However, some FTSE 100 income shares have bucked the trend.

As such, despite the global economic uncertainty, buying stocks with defensive characteristics could be a sensible strategy for investors who are seeking a passive income.

Following recent stock price falls, they could also offer the potential for a high total return when held as part of a diverse portfolio of stocks.

FTSE 100 income shares on offer 

If you’re looking to build a passive income stream to retire on, defensive income shares are certainly worth considering. Companies with defensive characteristics are less likely to be impacted by changes in the outlook for the economy.

Therefore, they’re less likely to cut their dividends to investors in an uncertain economic environment. 

This means defensive FTSE 100 income shares tend to be much better income investments than cyclical companies. Cyclical businesses can make a lot of money in good times, but earnings usually slump in times of economic uncertainty. 

Margin of safety 

However, despite the advantages of defensive stocks, the recent stock market decline has hurt investor sentiment towards them.

That means many defensive FTSE 100 income shares now offer dividend yields that are above their historical averages. This suggests that now could be a great time to buy these income stocks. A high yield compared to history can be an indicator of a margin of safety. So, it looks as if many of these companies are now on special offer. This could be a great opportunity for investors with a long-term outlook. 

These undervalued income stocks may also offer the potential for capital gains over the long run.

As investor confidence returns, defensive FTSE 100 income shares may become more popular alongside the broader stock market. These companies could also experience an improvement in demand as the global economy recovers. 

Diversified income 

Of course, the performance of any one company is never guaranteed. Even the most defensive company can experience unforeseen challenges. 

That’s why it may be sensible to build a basket of FTSE 100 income shares. Purchasing a diverse range of companies in different sectors, that have exposure to varied industries and geographies will reduce risk.

It should also give you a more predictable income stream over the long term. By owning a diverse range of companies, even if one or two cut their payouts to shareholders, a passive income stream should still be available. 

So overall, after the recent stock market crash, there is now a range of FTSE 100 income shares that appear to offer a margin of safety. Buying a diversified basket of these stocks could help long-term investors generate a passive income stream in retirement. 

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to read our presentation.

Rupert Hargreaves 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.