Buying shares during an uncertain period is never an easy task. The potential for losses in the short run may cause many investors to decide to wait until the outlook for the stock market and the world economy is less risky.
However, adopting that strategy could prove to be an unwise move. After all, history shows that the FTSE 100 has always recovered from bear markets and the impact of recessions, while buying cheaper stocks can lead to higher returns for investors in the long run.
Moreover, FTSE 100 dividend stocks offer a significantly higher income return than other mainstream assets at the present time. As such, buying them today may lead to impressive total returns in the long run.
With the FTSE 100 currently having a dividend yield of around 4.25%, it is likely to offer a higher income return than other mainstream assets. Cash ISAs, for example, yield around 1% at the present time, while bonds may also struggle to post a positive return when inflation is factored in.
Even property may be unable to beat the FTSE 100’s income return on a net basis. Certainly, higher yields on buy-to-let investments may be available in parts of the UK. But after costs such as void periods and taxes are factored in, the FTSE 100’s return may beat that of buy-to-let on a net basis.
As such, for income-seeking investors, FTSE 100 stocks could prove to be the best means of obtaining an inflation-beating income return over the long run.
Although the FTSE 100 is still in a bull market, its recent performance has been highly volatile. This trend may continue over the coming months, with the trade dispute between the US and China seemingly unlikely to be resolved in the near term.
While this may lead to depressed prices for FTSE 100 shares in the short run, over the long term the index seems likely to deliver capital growth. It has been able to overcome bear markets from economic shocks such as the oil crisis, tech bubble and financial crisis to post higher highs.
Therefore, while a long-term recovery cannot be guaranteed, it seems to be highly likely based on the index’s past performance.
The FTSE 100’s uncertain outlook could mean that a number of its members now offer wide margins of safety. This could allow an investor to obtain more favourable risk/reward ratios for high-quality stocks that have strong growth outlooks.
In fact, buying during periods of uncertainty could produce higher returns over the long run. Since a number of large-cap shares currently have price-to-earnings (P/E) ratios that are below their long-term averages, there may be a wide range of bargain stocks available that have the capacity to produce high total returns over the coming years.
- Don't gamble on the National Lottery. I'd aim for a million like this
- How you can double your State pension for the price of a cup of coffee a day
- Warning! A Cash ISA can destroy your wealth: here’s why I’d buy FTSE 100 stocks instead
- Forget a Cash ISA: I’d buy 5%+ yielding FTSE 100 shares to get rich and retire early
- Is the Lloyds share price a bargain after crashing 30%?
- Top shares for 2019
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