Investing in cheap dividend shares following the FTSE 100’s recent market crash may not seem like an attractive proposition to many investors. After all, there is a chance that further dividend cuts will take place as a weak economic outlook is likely to negatively impact on the financial prospects for many income shares.
However, with low valuations, high yields and recovery potential, the prospects for dividend shares could be more impressive than many investors realise. As such, investing £5k, or any other amount, in them via an ISA today could prove to be a shrewd move that helps to improve your prospects of retiring early.
FTSE 100 dividend yields
The FTSE 100’s market crash means that many dividend stocks now offer relatively high yields. Investors may be cautious about the prospects for income shares as a result of the economy’s uncertain prospects. It could mean that dividends are cut at a large number of businesses, and that their dividend growth rates fail to match those of recent years.
However, the yields on offer among income shares currently suggest that those risks may be factored-in. It is possible to obtain a relatively attractive yield from a basket of income shares. Through building a diverse portfolio of dividend stocks, the overall income return could prove to be relatively attractive, even if dividend growth is somewhat lacking over the short term.
The yields and valuations on offer from FTSE 100 dividend shares could make them highly attractive for income-seeking investors. Previously, demand for dividend shares may have been lower due to the appeal of other income-producing assets such as cash and bonds. However, with interest rates now at historic lows, investors may pivot towards income shares due to the poor returns available elsewhere.
Over time, this could raise demand for dividend shares. It could mean that their prices rise – especially since fewer large-cap businesses now pay dividends than was the case just a few months ago. This scarcity value may concentrate income-seeking investors in a relatively limited number of stocks that helps to push their prices higher.
Stock market recovery
Investing in FTSE 100 dividend shares could produce high total returns over the long run. The index’s past performance shows that a large proportion of its returns have been derived from the reinvestment of dividends. Therefore, focusing your capital on companies that can pay dividends over a sustained period could have a significant impact on the value of your retirement nest egg.
Certainly, there may be challenging operating conditions ahead for many large-cap income shares due to the weak economic outlook. However, buying them while they offer high yields and low valuations could lead to impressive returns on a relative basis that improve your financial prospects over the coming years.
The post £5k to invest in an ISA? I’d buy cheap FTSE 100 dividend stocks to get rich and retire early appeared first on The Motley Fool UK.
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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