Investing in dividend stocks through a Stocks and Shares ISA could be a sound move for long-term investors. The index appears to offer good value for money, income potential and improving prospects for capital growth over the long term.
As such, buying a variety of large-cap income shares could prove to be a sound move at a time when other mainstream assets such as bonds, cash and property appear to lack enticing risk/reward opportunities.
The FTSE 100’s price level is still some way off its record high despite its recent rise. This in itself suggests that a wide margin of safety could be on offer. Its dividend yield of over 4% has rarely been higher, except during significant bear markets. Although the index experienced a downturn in 2018, this has largely been erased by its performance in recent months.
As such, there are a number of large-cap stocks that offer low valuations. Sectors such as banking, utilities and retail continue to be unpopular among investors, with the price-to-earnings (P/E) ratios of members of those industries being significantly lower than their long-term averages in many cases.
As mentioned, the index’s yield is relatively high. However, it is possible to generate a significantly greater dividend yield on a portfolio than the index’s 4%. Over 25 stocks in the FTSE 100 currently have yields that are greater than that of the index, which indicates that it may be possible to generate a 5% or even 6% yield from a portfolio of large-cap stocks.
Of course, ensuring that a Stocks and Shares ISA is sufficiently diversified is of high importance. With the FTSE 100’s high-yielding shares operating across a broad range of sectors and regions, it may be possible to build an income portfolio that also limits risk over the long run.
Although there is a continued threat from a global trade war, the world economy’s growth prospects continue to be relatively bright. The US economy is growing at a relatively fast pace, while the emerging markets growth story looks set to run over the coming years.
With the FTSE 100’s focus being on international opportunities rather than domestic ones, it could be a good means for investors to easily gain exposure to the world economy’s growth prospects. This could allow them to generate a higher rate of return than if they invested solely in the UK – especially at a time when Brexit is causing a significant amount of disruption and uncertainty.
Therefore, from a growth, income and value perspective the FTSE 100 could offer significant appeal. With a Stocks and Shares ISA having tax benefits and being a low-cost product that is very accessible to a wide range of investors, now could be a good time to buy large-cap dividend shares for the long run.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019
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