UK Markets closed

Have £10k to invest? I’d buy FTSE 100 dividend shares in 2020

Peter Stephens
A person holding onto a fan of twenty pound notes

Interest rates are expected to stay at low levels in 2020, which could make FTSE 100 dividend shares even more attractive.

They have proved to be relatively unpopular among investors during recent months, with fears surrounding the global economy’s outlook holding back sentiment.

However, with low valuations, growth potential and solid fundamentals on offer, now could be the right time to invest £10k (or any other amount you might have) in large-cap income shares.

Income returns

The FTSE 100’s dividend yield currently stands at above 4%. That’s significantly higher than its long-term average, and is also above the income returns of many other assets.

For example, cash savings accounts offer interest rates of under 1.5% at the present time. Similarly, investment-grade bonds offer significantly lower returns than FTSE 100 shares. In many cases, in fact, the returns on cash and bonds are below inflation. This could mean that bondholders and savers see their spending power reduced over the coming years.

Likewise, property investments may offer lower income returns than FTSE 100 dividend shares. Rising house prices over the last decade mean that in some areas of the UK it is difficult to obtain a gross yield of over 4%. After tax, void periods and repairs have been deducted, this can mean that the net return paid to landlords is substantially beneath the dividend return of FTSE 100 shares.

Valuations

FTSE 100 shares continue to offer good value for money at the present time. Despite the world economy delivering resilient growth in recent years and other indices such as the S&P 500 soaring to new record highs, the UK’s large-cap index’s performance has been somewhat disappointing. Many of its major companies trade on low valuations that could indicate they offer wide margins of safety.

In the short run, those valuations may continue to be low. Risks facing the world economy could weigh on the index’s performance. But in the long run, the FTSE 100 could deliver strong capital growth as an improving outlook for the world economy translates into rising earnings for its members.

Investment potential

For investors who can take a long-term outlook therefore, the FTSE 100 could offer significant investment appeal. Investors who are unsure about where to invest in 2020 may find that building a portfolio of large-cap shares is a highly rewarding process. There are a range of companies that offer strong balance sheets, solid cash flow and sound growth strategies. In many cases, they trade on valuations that suggest there are high total returns ahead.

As such, even after a decade-long bull market, the FTSE 100 appears to be a worthwhile investment opportunity – especially for income investors. Now could be the perfect opportunity to invest £10k, or any other amount, in large-cap shares through a tax-efficient account such as a Stocks and Shares ISA.

More reading

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 2019