Investing £5k, or any other amount, in cheap FTSE 100 dividend stocks may not sound like a shrewd move at present. The world economy currently faces one of its most challenging periods in living memory. And this could see operating conditions for many large-cap shares deteriorate.
However, the FTSE 100’s recovery potential, with its income prospects and low valuations, suggest now could be the right time to buy a diverse range of dividend stocks in an ISA. They could boost your financial prospects over the coming years.
Low valuations
Buying FTSE 100 shares when they trade at low prices has been a successful strategy for many investors in the past. It allows you to access wide margins of safety for high-quality businesses. And that can translate into high returns over the long run.
Currently, many FTSE 100 stocks trade on valuations significantly below their historic averages. In some cases, they may be warranted due to highly uncertain outlooks. But, with equities relatively unpopular due to increased risk-aversion among investors, a number of high-quality large-cap shares currently offer good value for money.
Buying them while their prospects are unclear requires self-discipline. But, in many cases, their low valuations suggest potential challenges in their sectors have been factored in by cautious investors.
Recovery potential
The FTSE 100 has an excellent track record of recovering from its most challenging periods. It’s experienced a number of bear markets, corrections and crashes in its 36-year lifetime. Yet it’s been able to rise six-fold from 1,000 points in 1984 to around 6,000 points today. When dividends are factored in, its total returns are in excess of 8% per annum since inception.
Investors may naturally be cautious about the prospect of buying shares due to the unprecedented situation that many economies currently face. However, backing the FTSE 100’s recovery potential has historically been a sound move. Its allowed investors to capitalise on improving business environments and stronger sentiment among their peers.
The same outcome may appear unlikely in the current economic climate but, over the coming years, the FTSE 100 is likely to deliver a successful return to previous record highs.
FTSE 100 dividend appeal
The FTSE 100 may also offer income investing appeal over the long run. Although some of its members have reduced their dividends in recent months, due to their uncertain outlooks, many large-cap shares continue to make shareholder payouts as expected. Dividends across the index are also likely to return.
Meanwhile, the income appeal of other assets, such as cash and bonds, should remain low due to falling interest rates. So, demand for large-cap income shares could increase.
This could push their prices higher and lead to impressive total returns from the index. And that could make now the right time to buy a selection of FTSE 100 shares.