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Forget Cash ISAs, I’d buy bargain FTSE 100 dividend stocks

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Image source: Getty Images

With weak investor sentiment, many once-loved dividend stocks have seen their market-caps slashed. Even some leading enterprises inside the FTSE 100 haven’t been spared. And while the index as a whole seems to have largely recovered, the same can’t be said for all of its constituents.

With volatility in the stock market and interest rates on the rise, Cash ISAs are gaining popularity. After all, these are far safer saving vehicles. And compared to the double-digit declines experienced last year, they seem like a more prudent place to allocate capital, even if the interest returns don’t keep up with inflation.

In the short term, cash can be a solid hedge against inflation due to the more severe devaluation of other asset classes like stocks and real estate. But in the long run, this strategy can backfire as the alternatives eventually recover and reach new heights.

Dividend stocks in 2023

The stock market in 2023 is off to a good start. The FTSE 100 has climbed another 4% and is now sitting close to an all-time high! Does that mean the window of opportunity has closed? No. At least, I don’t think so.

As previously stated, not every business within the index has recovered. In some cases, this may be justified. But in others, buying opportunities for dividend stocks are hiding in plain sight. Don’t forget some of the best performances achieved in the stock market have historically been right after a crash or correction.

For income investors, the focus needs to be placed on the firms whose cash flows remain uncompromised and capable of long-term growth. Remember, dividends are optional payments for companies funded by cash flow.

If financial resources become strained, shareholder payouts are often put on the chopping block. And since dividend cuts almost always result in share price drops, further investment losses could be incurred.

Suppose a group’s revenue and earnings shrink due to temporary macroeconomic factors rather than a lack of demand for their products or services? In that case, providing the business has the necessary financial strength to weather the storm, investors could be rewarded for their patience.

On the other hand, if performance is suffering due to catastrophic internal problems, it’s likely best to move on.

Obviously, this isn’t the end of the line of enquiry. There are plenty of additional factors to consider before making an investment decision. Yet this initial filtering can quickly eliminate duds from consideration.

Risk management

Just because the stock market has started 2023 on a positive note doesn’t mean it will stay that way. Inflation in the UK remains in double-digit territory, and interest rate hikes are likely to continue as a consequence. That places more pressure on businesses seeking external financing and further tightening household budgets.

The Bank of England is trying to slow the economy down to get inflation under control. And that doesn’t create the best operating environment for growth or dividend stocks. Therefore, as earnings season kicks off, volatility may return to the markets.

These risk factors come with the territory of investing. And, in most cases, there’s no real way of avoiding them. However, it’s possible to mitigate the impact. A well-balanced and diversified portfolio can prevent any single poor-performing position from dragging down overall returns.

The post Forget Cash ISAs, I’d buy bargain FTSE 100 dividend stocks appeared first on The Motley Fool UK.

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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 2023