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Forget the National Lottery and Premium Bonds! I’d buy FTSE 100 dividend stocks for 2020

Peter Stephens
Woman calculating figures next to a laptop

It is a nice dream, but unfortunately, winning the National Lottery or Premium Bonds is very unlikely to happen to the vast majority of people. As such, now could be the right time to focus your spare change and savings on FTSE 100 dividend shares instead.

Specifically, income shares could be worth buying at the present time. Not only do they appear to offer good value for money in many cases, they may deliver superior income returns compared to other popular assets such as cash and bonds.

Furthermore, a large proportion of the FTSE 100’s past total returns have been derived from the reinvestment of dividends received. As such, buying and holding income shares could be a means of generating high total returns in 2020 and in the coming years.

Undervalued opportunities

While the FTSE 100 has a relatively appealing dividend yield of 4.5% at the present time, a number of its members offer even higher income returns. For example, around 25% of FTSE 100 stocks currently yield over 5%, with some having yields that are in excess of 6% or even 7%.

In many instances, defensive shares that may not offer the same level of growth potential as their cyclical peers have fallen out of favour with investors. This is not a major surprise, since the world economy has enjoyed a decade of strong growth. However, with a number of risks facing that economy, defensive shares could become more popular among investors who may adopt an increasingly risk-averse stance during 2020.

Therefore, the high yields that are on offer across the FTSE 100 could suggest that there are value investing opportunities on offer – especially if global economic risks mount in the coming months.

Relative appeal

While it is possible to generate an income return that is two or even three times the rate of inflation from FTSE 100 shares, other assets offer negative real-terms returns. For example, obtaining an income return in excess of inflation from cash or investment-grade bonds at the present time may be difficult. Similarly, high house prices mean that after-tax yields on property may be relatively disappointing.

Therefore, with interest rates due to stay low over the next few years, according to various market forecasts, FTSE 100 shares could become even more appealing to income-seeking investors. This may boost their popularity and lead to them delivering share price growth.

Total returns

Reinvesting dividends seems to be an underrated aspect of investing. Historically, it has contributed a significant part of the FTSE 100’s total returns, and could do likewise in the long run.

Additionally, dividends provide an investor with positive cash flow that can be used to add to their portfolios during periods of time when shares offer low valuations. This could further improve their portfolio’s risk/reward ratio, and produce higher returns in 2020 and in the long run.

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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 2019