Economic uncertainty has caused many FTSE 100 companies to delay, cancel, or cut their dividends. As such, it’s more difficult than it was just a few months ago to generate a passive income from FTSE 100 shares.
However, there are still some companies offering high yields in the current year. And, over the long run, the index appears to offer significantly greater income return prospects than other income-producing assets, such as a Cash ISA.
Therefore, now could be the right time to buy FTSE 100 dividend stocks for the long run to generate a passive income.
FTSE 100 dividend opportunities
Although a large proportion of FTSE 100 dividend stocks are not set to make shareholder payouts in the short run, some sectors have not been affected by coronavirus in terms of their financial performance.
For example, healthcare, utility and some consumer goods businesses have recently reported relatively robust financial performances. Their financial prospects are less closely correlated to the wider economy than many of their FTSE 100 index peers. As such, they may offer attractive yields today. They may also have the potential to deliver rising dividends in the coming years.
Long-term income opportunities
Over the long term, many FTSE 100 companies are likely to return to paying generous dividends to their shareholders. In the short run, a large number of FTSE 100 businesses appear to have the financial strength required to survive what is a challenging economic period. The world economy has always recovered from its various recessions to post positive GDP growth. So a return to more favourable trading conditions that allows dividends to be paid seems likely.
As such, the FTSE 100 could offer greater scope to generate a generous passive income than a Cash ISA over the coming years. Low interest rates look set to remain in place for many years. That’s because the Bank of England is likely to seek to support the economy’s performance for as long as possible. This may mean Cash ISAs fail to offer an income return that keeps pace with inflation. The end result could be that your spending power declines over the long run.
At the present time it’s difficult to know which FTSE 100 sectors and which geographical regions will be most affected by coronavirus. Some industries may return to normal faster than others. And those may also be able to pay attractive dividends sooner.
Therefore, it’s logical to purchase a diverse range of income shares at the present time. Their low valuations could mean that they also deliver strong capital growth to complement their long-term passive income potential.
While the short term may be challenging for income investors, the FTSE 100’s low price level could present buying opportunities that yield impressive returns in the coming years.
The post Forget Cash ISAs. I’d buy cheap FTSE 100 dividend stocks today to make a passive income 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