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£5k to invest today? I’d buy cheap FTSE 100 dividend stocks in an ISA for a passive income

The FTSE 100’s market crash has caused many of its members to offer relatively high dividend yields. Certainly, a number of large-cap stocks have paused their shareholder payouts. But some FTSE 100 shares continue to offer attractive yields, as well as dividend growth potential.

As such, investing £5k, or any other amount, in a wide range of them today in a tax-efficient account such as an ISA for the long term could be a more effective means of generating a passive income compared to other assets such as cash and bonds.

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FTSE 100 dividend yields

An uncertain outlook for the world economy means dividend cuts have been commonplace across the FTSE 100. In many cases, those companies are likely to reinstate their dividends as the economy’s outlook improves. But, in any case, there are a number of businesses that continue to experience solid financial outlooks. These are expected to maintain their dividend payments throughout 2020.

Due, in part, to weak investor sentiment, many FTSE 100 shares currently offer high yields. In fact, it’s possible to generate an annual income return in excess of 5% from a basket of large-cap shares. Therefore, investors can use the current low price level of the index to their advantage, in terms of obtaining higher yields than were possible just a few months ago.

Dividend growth potential

Dividend growth has been strong across many FTSE 100 sectors over recent years. Although, in 2020 and even over the next couple of years, the rate of dividend growth may decline, over the long run, a resumption of inflation-beating dividend growth rates seems likely.

Monetary policy stimulus has the potential to boost the economy’s outlook. Likewise, the global economy’s track record of recovering from every one of its previous recessions to post growth suggests the operating environments for many FTSE 100 businesses could improve. Therefore, buying a portfolio of dividend stocks today could generate rising income returns for investors over the coming years.

Other opportunities

The landscape for income-seeking investors has become more challenging as a result of coronavirus. Other income-producing assets, such as Cash ISAs and bonds, now offer lower income returns due to a decline in interest rates to just 0.1%. With the Bank of England likely to maintain an accommodative monetary policy to boost the economy, there’s a lack of choice for income investors who are seeking to make a passive income.

Therefore, while the FTSE 100 could experience a challenging period that includes paper losses for investors over the coming months, large-cap dividend stocks could be the most attractive means of generating a passive income. Over the long run, many of the index’s members could deliver dividend growth. This could make now the right time to buy a diverse range of them in a tax-efficient account such as an ISA.

A top income share that boasts a reliably defensive business model… plus a current forecast dividend yield of 4.2% to boot!

With global markets in turmoil as the coronavirus pandemic tightens its grip, turning to shares to generate income isn’t as simple as it used to be…

As the realities of ‘life under lockdown’ begin to bite, many of the stock market’s ‘go-to’ high-yielding companies have either taken an axe to their dividend pay-outs… or worse, opted to suspended them altogether – for the near-term at least.

With so many blue-chip and mid-cap companies scrambling to hoard cash right now, where are we income investors to turn for decent yields?

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Our analyst has unearthed what he believes could be a very attractive option for income- seeking investors – a company that, in his view, boasts a ‘reliably defensive’ business model, combined with a current forecast dividend yield of 4.2% to boot!*

But here’s the really exciting part…

This business even has form in riding out this kind of situation, too… having previously increased sales and profits back in 2008 and 2009 when the world was gripped in the deepest economic crisis since the Great Depression.

*Please be aware that dividends are variable and not guaranteed.

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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.