Buying cheap FTSE 100 dividend stocks in an ISA could be a means of building a generous nest egg from which to generate a passive income in older age.
Although the index has enjoyed a resurgence in recent weeks that has enabled it to recover much of the ground it lost in the recent market crash, it continues to offer a number of stocks that trade below their historic average valuations.
With long-term growth potential and a track record of recovery, now could be the right time to buy undervalued large-cap shares for the long run.
FTSE 100 values
Some FTSE 100 shares are now trading higher than they were at the start of the year. The index had, after all, gained around 10% at one point in the last month, although on Friday it closed up less than 7% higher than a month earlier.
However, a wide range of companies continue to offer wide margins of safety. Sectors such as financial services, housebuilding, retail, resources and travel & leisure contain companies that are priced well below their long-term averages in many cases. They could provide wide margins of safety that produce high returns in the long run as the economy gradually recovers.
Historically, buying undervalued FTSE 100 shares has been a sound means of obtaining above-average returns. This strategy allows investors to use market cyclicality to their advantage, and could have a positive impact on the size of your portfolio in the coming years.
Dividend appeal
Through buying stocks that are likely to resume their payment of rising dividends in the long run, you could generate high total returns. A large portion of the FTSE 100’s historic returns have been produced by the reinvestment of dividends. Therefore, income shares are likely to be attractive for anyone who is seeking to build a large retirement nest egg over the long run.
Dividend stocks could become increasingly popular among investors due to the lack of an income return available elsewhere. Low interest rates mean that demand for dividend shares could rise, which may lead to higher prices that inflate the size of your retirement nest egg.
Track record
Although there could be further difficulties ahead for the FTSE 100 due to risks such as a second wave of coronavirus later this year and trade tensions between the US and China, its long-term prospects seem to be bright. It has overcome several major bear markets in the past few decades, and has been able to post an annualised return of over 8% in doing so.
As such, with other assets such as cash and bonds offering paltry returns, buying FTSE 100 dividend stocks could be a relatively sound means of obtaining a high return in the coming years. Since a Stocks and Shares ISA offers tax efficiency, it could further enhance your return prospects and help to bring your retirement date a step closer.