Buying FTSE 100 dividend shares may seem to be a risky move at present. After all, many companies may decide to reduce their dividends in light of difficult operating conditions.
However, low interest rates may mean demand for dividend shares increases significantly over the medium term. Improved dividend growth may also take place among many large-cap shares as their operating environments improve.
As such, purchasing a selection of dividend shares now could be a better means of generating high returns than buying other assets, such as Bitcoin.
FTSE 100 dividend share demand
Demand among income-seeking investors for FTSE 100 dividend shares could increase over the coming years. The Bank of England recently said it would be likely to unwind its quantitative easing programme before considering interest rate rises. This could prolong a period of historic low interest rates. And, with the future prospects for the economy remaining uncertain, negative interest rates aren’t currently being ruled out by policymakers.
The end result may be that there’s less choice for income investors. Cash ISAs and bonds may, for example, fail to offer positive returns after inflation is factored in. This may cause demand for dividend shares to rise, since they could offer significantly greater income returns than other assets. Especially because their yields are now higher in many cases following the index’s market crash.
Rising demand for FTSE 100 dividend shares could mean their prices rise. Since there are now fewer companies in the index paying dividends, due to uncertain operating conditions, they could become increasingly attractive for investors who are seeking to generate high total returns in the coming years.
Dividend growth potential
Although FTSE 100 dividends have been cut in many cases in recent months, they’re likely to return over the coming years. The world economy’s track record of recovery from recessions is very strong. Meanwhile, policy action has generally been swift in response to lockdown measures put in place due to coronavirus.
Therefore, dividend growth could prove to be much stronger over the coming years than stock valuations currently suggest. As such, investors may be able to access attractive yields today, and obtain an inflation-beating growth rate in their income over the long term.
Since a large proportion of the index’s past total returns have been derived from the reinvestment of dividends, this could lead to a surprisingly large portfolio valuation.
With FTSE 100 dividend shares continuing to be relatively unpopular, and Bitcoin having doubled since its March low, some investors may consider purchasing the virtual currency instead of income stocks. However, Bitcoin’s lack of fundamentals, regulatory risks, and a lack of a long-term track record mean that purchasing dividend shares in an ISA while they’re relatively cheap could entail a more favourable risk/reward ratio for long-term investors.
The post Forget Bitcoin. Now could be the right time to buy cheap FTSE 100 dividend stocks in an ISA 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