Investing £5k, or any other amount, in the FTSE 100 today may seem to be a risky move. The index has been highly volatile in recent trading sessions, with the uncertainty posed by factors such as the coronavirus and geopolitical risks across the US, Europe and the Middle East causing investors to adopt a cautious attitude towards equity markets.
However, history has shown that buying stocks during such periods can be a worthwhile move. The FTSE 100, for example, has always recovered from its downturns to post new highs. As such, now could be the right time to buy a range of FTSE 100 income shares in a Stocks and Shares ISA while they trade on low valuations.
Value opportunities
The FTSE 100 may have returned around 9% per annum from capital growth and dividends since its inception, but the index still seems to offer a wide margin of safety for new investors. This may be somewhat surprising after the index has enjoyed a bull market for over 10 years, but its 4.4% dividend yield suggests that there are numerous stocks trading on low valuations.
In the short run, those valuations could realistically become even more attractive. The extent of the impact of coronavirus on the world economy is impossible to quantify at the present time. It could cause a significant amount of disruption, or it may follow a similar pattern to similar events in the recent past in terms of not having a sustained impact on global GDP growth.
As such, investors who buy shares today could experience a volatile period in the short run that includes paper losses. However, the track record of the FTSE 100 shows that it offers long-term growth, and that buying during periods of weakness enables investors to obtain more favourable risk/reward opportunities that can enhance their financial prospects.
Income potential
With interest rates expected to stay at low levels over the medium term, FTSE 100 dividend stocks could become increasingly attractive. Savers and fixed-income investors may struggle to obtain an inflation-beating income return from their capital. This may increase the demand for large-cap income shares, and could lead to higher share prices for dividend-paying businesses.
Therefore, as well as high yields and the prospect of dividend growth, income shares may offer a high level of capital return. This could make them appealing to both income and growth investors – especially with the growth prospects for the world economy being uncertain at the present time.
Buying dividend stocks through a Stocks and Shares ISA offers tax efficiency. With the annual dividend allowance standing at just £2,000, reducing your tax bill could become a highly relevant pursuit for an increasing number of investors. As such, as well as buying FTSE 100 income shares while they offer wide margins of safety, doing so through a tax-efficient account could be a worthwhile move over the long run.