Obtaining a passive income from FTSE 100 dividend stocks has become more challenging in 2020. Many companies have been forced to cancel their dividends this year due to coronavirus, which leaves less choice for income-seeking investors.
However, with Cash ISAs offering low income returns and the prospects for buy-to-let being highly uncertain, the FTSE 100 could offer a relatively attractive income opportunity over the long run.
As such, now could be the right time to buy cheap, financially-sound FTSE 100 stocks in a Stocks and Shares ISA for the long term.
FTSE 100 dividends
Although a relatively large number of FTSE 100 stocks are not due to pay dividends this year, many large-cap shares continue to plan to make shareholder payouts in the short run. They include businesses that have defensive characteristics, which are less affected by a global economic slowdown than their index peers.
With investor sentiment towards equities being relatively weak at the present time, it is possible to buy FTSE 100 dividend shares at low prices. This means that they offer higher yields than they have done in the past few years in some cases, which presents the opportunity to obtain a generous income return over the long run.
Relative appeal
Obtaining a generous income return outside of the FTSE 100 has also become much more challenging in recent months. Cash ISAs, for example, now offer exceptionally low returns due to a fall in interest rates to historic lows. There is also the potential for negative interest rates should the economy require further monetary policy stimulus. As such, savers may yet experience further difficulties in generating a return from their Cash ISAs over the coming years.
Buy-to-let investments may also fail to provide a worthwhile income return – especially on a net basis. An economic downturn seems likely to dampen rental growth, and could even lead to longer void periods for landlords should unemployment rates rise rapidly. And, with tax changes causing the net returns available to property investors to be less attractive than they have been over recent years, the sector may lack income appeal compared to FTSE 100 dividend stocks in the long run.
Selecting FTSE 100 stocks
Choosing which FTSE 100 stocks to buy can be a difficult process during a period of economic uncertainty, when profit warnings are likely to be fairly common. However, by diversifying across a range of sectors, picking stocks with solid balance sheets, and selecting those businesses with defensive appeal, you can generate a sound passive income over the long run.
Furthermore, with many FTSE 100 dividend stocks being cheap at the present time, there may be capital growth potential on offer. This could boost the size of your portfolio and make the task of earning a generous income easier over the coming years.