The FTSE 100’s recent decline is likely to dissuade many income investors from buying dividend shares. After all, even if you can obtain a higher income return from the stock market, the prospect of a 15%+ fall in the capital value of your portfolio isn’t exactly appealing.
However, the FTSE 100 has a long track record of ups-and-downs. It’s always recovered from the downturns to post new record highs. Many of its members also have dividends that are well-covered by profit and could grow in the long run.
As such, now could be the right time to buy a diverse range of FTSE 100 companies to benefit from their low valuations and enjoy a rising passive income in retirement.
The FTSE 100 now has a dividend yield of around 5% following its recent decline. Compared to other mainstream assets, this is an exceptionally high return. For example, cash savings accounts offer interest rates of around 1.25% at the present time, while investment-grade bond yields also fail to offer a positive after-inflation yield, in many cases. Furthermore, tax changes and high house prices mean that buy-to-let investments are unattractive compared to five or 10 years ago.
As such, buying a range of FTSE 100 shares today could be a sound means of improving your passive income. In many cases, FTSE 100 companies have significant amounts of headroom when making their dividend payments. This means that they may not need to cut dividends due to a potential slowdown in global economic growth in the short run. It may also enable them to raise their shareholder payouts over the long run to improve your passive income in older age.
Although losing money on your investments is always a difficult process, the reality is that the losses are unrealised until you sell your holdings. In other words, the value of your dividend shares will fluctuate over the short term, but is more likely to rise than fall over the long term, due to the FTSE 100’s track record of recovery from challenging periods.
As such, taking a long-term view of your investments and capitalising on high yields following market crashes could be a sound move. It may not produce high returns in the near term, and could even lead to paper losses, but could enable you to maximise your passive income in the coming years as the FTSE 100 potentially recovers and its members pay rising dividends.
In addition, buying a diverse range of companies with exposure to different geographies and industries could help to reduce your overall risk. It may also enable you to benefit from strong growth in multiple sectors and regions which ultimately allows you to experience a relatively robust growth in dividends received from your portfolio.
The post Want to retire comfortably? I’d buy cheap FTSE 100 dividend shares for 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