Buying cheap FTSE 100 dividend stocks today could be a means of building a sizable financial nest egg, with the potential to generate passive income.
Indeed, even though the UK’s leading stock index has enjoyed a substantial recovery in recent weeks after the March market crash, many dividend stocks continue to trade below the historic average valuations.
As such, now could be a great time to buy these companies that have attractive long-term growth and income prospects.
FTSE 100 dividend stocks
Historically, buying undervalued FTSE 100 shares has been an excellent means of obtaining above-average returns. Over the past few decades, the index has seen many peaks and troughs.
On every occasion, it has recovered its losses over the next few months and years. Investors who were able to buy at the bottom of the market have seen healthy returns. Improving investor sentiment has helped push equity prices higher.Â
Using the same strategy today could have a positive impact on the size of your portfolio over the next few years.
FTSE 100 dividend stocks look particularly attractive in the current market. In recent months, many FTSE 100 dividend stocks have decided to withhold their dividends to preserve cash. This seemed to be the best decision at the height of the coronavirus crisis. As the world adapts to the new normal, these companies may decide to reinstate their dividends.
Therefore, all these companies are likely to become more attractive among investors over the coming months due to the lack of income return available elsewhere.
Diversified investments
While there could be further problems ahead for the FTSE 100, its long-term prospects seem bright. A second wave of coronavirus could provide additional headwinds to the global economy. A protracted trade war between the United States and China could only add further uncertainty to the mix.
Still, we have been here before. The index has suffered numerous setbacks since its founding in the 1980s. But despite these issues, it has been able to produce an annualised return of over 8%. Dividend income has accounted for the bulk of this return.
The FTSE 100 is one of the world’s most attractive income indexes and currently has an average dividend yield of 4%. By reinvesting company dividend income over the past few decades, investors have been able to achieve high total returns. This strategy also allows investors to use market cyclicality to their advantage. Reinvesting dividends when stocks fall could improve returns over the long term.
Buying a basket of dividend stocks may be the best way to profit from such a strategy. By diversifying across a range of geographies and sectors, investors can benefit from the wealth-creating abilities of the FTSE 100 without having to worry about individual company performance.
This could help you generate a passive income. It may also result in capital gains as investor sentiment towards income stocks improves.