The recent stock market crash may cause investors to consider other investments, such as the Cash ISA. After all, cash is generally considered to be a safer asset than stocks. But this could be a big mistake. I’d buy FTSE 100 dividend shares for income instead.
FTSE 100 dividend shares
The interest rates available on Cash ISAs have been steadily declining for the past 10 years. This trend has only accelerated in 2020. The best instant access Cash ISA interest rate on the market at the moment is just 1%. That’s down from around 1.3% of the end of last year.
With this being the case, while investors might be drawn to Cash ISAs after the recent stock market crash, if it’s income you’re after, FTSE 100 dividend shares may be a much better option.
Buying FTSE 100 dividend shares after the recent stock market crash might seem like a risky prospect. However, over the past few decades, the index has encountered several severe sell-offs. On every occasion, it has staged a healthy recovery. Sometimes it’s taken several years, but it always came back. There’s no reason to believe the situation will be any different this time.
What’s more, while many FTSE 100 dividend stocks have cut their dividends recently, the index still supports an average yield significantly above the best Cash ISA rate. At the time of writing, the FTSE 100’s dividend yield stands at just over 4%.
It’s relatively straightforward to achieve this level of income. All you need to do is buy a low-cost FTSE 100 tracker fund. The added bonus of using this method to invest in FTSE 100 dividend stocks is diversification. Buying a tracker fund gives you diversification across many sectors, industries and geographies.
Another option is to buy FTSE 100 dividend stocks individually. This process can be a bit more time consuming than buying a tracker fund. But it could be worth the extra effort.
The best income stocks tend to be defensive companies. These organisations may be impacted less by economic trends and consumer spending patterns. They could also offer more in the way of income than the FTSE 100 as a whole.
British American Tobacco, for example, recently reported that the coronavirus crisis has hardly impacted its operations. The stock offers a dividend yield of more than 6%, at the time of writing.
Building a diversified portfolio is especially important when picking individual stocks. These groups might offer the potential for a higher level of income. By spreading your money across different companies, the risk of making a bad investment falls.
As such, it may be best to ensure no single company makes up more than 5% of the portfolio. This approach should help you generate a sustainable passive income stream over the long run.
Rupert Hargreaves owns shares in British American Tobacco.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.