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The FTSE 100 is falling! I’d buy cheap dividend stocks today to make a passive income

Peter Stephens
Stack of new one pound coins

The FTSE 100’s recent decline means that the index now offers a dividend yield of around 4.8%. That’s its highest level in around a decade, and suggests that it offers income investing appeal at the present time.

Clearly, there is scope for the index to fall further. But with its long-term growth potential being relatively high and many of its members currently offering incredibly attractive yields, now could be the right time to buy large-cap shares to make a generous passive income.

High yields

The FTSE 100’s dividend yield of 4.8% may be relatively high, but it is possible to build a portfolio that offers an even higher passive income each year. In fact, obtaining a 6% portfolio yield from a diverse range of stocks may not be a challenging process since many of the index’s members have higher yields than the FTSE 100.

As well as high yields, the FTSE 100 offers the potential to generate impressive dividend growth. Certainly, risks such as coronavirus are set to cause a slowdown in the growth rate of the world economy in the short run. But over the long run, the past performance of the world economy highlights its recovery potential from major economic challenges. As such, many of the FTSE 100’s high-yielding shares may offer impressive dividend growth rates in the coming years.

Relative appeal

While the falling FTSE 100 may produce paper losses in the short run, its long-term income prospects appear to be significantly brighter than those of other assets. For example, low interest rates mean that the returns on cash and bonds are barely above inflation in many cases. This may mean that they fail to offer an adequate passive income unless you have an exceptionally large amount of capital.

Similarly, rising taxes may mean that the returns on buy-to-let investments are somewhat lacklustre. As such, investing in a diverse range of FTSE 100 shares and generating a net income return of 5% or even 6% through tax-efficient products such as a Stocks and Shares ISA could be a worthwhile move – especially compared to the returns on other mainstream assets.

Recovery potential

Alongside its potential to deliver impressive income returns in the coming years, the FTSE 100 offers capital growth prospects. It has always recovered from its downturns to post new record highs and while the coronavirus outbreak is likely to dampen the world economy’s growth rate in the short run, the FTSE 100’s turnaround potential over the long run seems to be high.

As such, now could be the right time to buy a range of high-yielding FTSE 100 shares and hold them for the long run. You may not make vast amounts of profit in the coming months, but your portfolio and passive income could be really attractive over the coming years.  

The post The FTSE 100 is falling! I’d buy cheap dividend stocks today to make a passive income 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