The FTSE 100’s market crash in 2020 has caused many investors to worry about the performance of their portfolios. That’s understandable as a wide range of large-cap shares have recorded price falls and dividend cuts in recent weeks.
However, the FTSE 100 has experienced similar declines in its past. And it has always been able to record higher highs following its falls. Additionally, its income prospects have gradually improved since its inception.
As such, for long-term investors, now could be the right time to buy a diverse range of large-cap shares. Doing so could improve your prospects of retiring early.
A large proportion of the FTSE 100’s historic total returns have been derived from the reinvestment of its dividends. So recent cuts to shareholder payouts across the index could be viewed as a cause for concern.
However, in previous bear markets and global recessions, dividend cuts were also commonplace. Likewise, in previous market downturns a wide range of FTSE 100 companies asked their shareholders to provide capital to help them through economic challenges. As such, share placings and rights issues have been fairly common in the past. And they may yet be ahead for some FTSE 100 members.
Despite this, the index has been able to offer relatively impressive dividend growth over the long term. And this has helped to increase its price level. Moreover, past crises have never lasted in perpetuity, and FTSE 100 stocks have generally gone on to pay generous dividends that rise at an above-inflation pace over the long run. Although the same outcome cannot be guaranteed following the difficulties associated with coronavirus, history shows that a long-term recovery is highly likely.
Clearly, buying any stock at the present time is likely to be a risky move in the near term. The FTSE 100’s price level could decline in the coming months.
However, through buying companies with solid financial positions you can reduce your risk of loss. For example, a business with a significant amount of cash and access to credit facilities may not require shareholder investment. It may not even need to cut dividends – especially if it operates in an industry such as defence or some consumer goods sectors where demand may be unaffected by coronavirus.
Likewise, diversifying across a range of sectors and geographies may further reduce your risk of loss. It could lead to you being less reliant on a small number of stocks for an income, which could lead to greater stability and a faster rate of dividend growth in the long run.
With other mainstream assets such as bonds and cash offering low income returns, dividend shares could become increasingly popular over the medium term. As such, now may be the right time to buy a selection of businesses that are relatively likely to maintain their dividend payments in the short run, and increase them in the long run. They could deliver high total returns that increase your chances of building a large nest egg to enable you to retire early.
The post Every FTSE 100 crash offers bargain shares. I’d buy cheap dividend stocks to retire early appeared first on The Motley Fool UK.
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.
Motley Fool UK 2020