Why it's never been easier to build a second income stream with FTSE 100 dividend stocks

A person holding onto a fan of twenty pound notes
A person holding onto a fan of twenty pound notes

Dividend investing has become increasingly popular in recent years. A period of low interest rates has meant that the returns on assets such as cash and bonds have been low, which has caused many investors to dive deeper into shares. And with inflation having been relatively high until recent months, the real return on stocks has made them highly attractive.

Even though the FTSE 100 has risen to record highs in 2018, it is still a great time to be an income investor. Here's why the dividend prospects for the index seem to be bright.

High yields

Even though the FTSE 100 has made strong gains in recent years, it continues to offer a high yield. It currently yields 3.9%, which is above its historic average. This suggests that there could be significant income opportunities within the index. For example, a third of its constituents offer higher yields than the wider index. And with one-fifth of FTSE 100 members having a dividend yield above 5%, it remains very possible to build a portfolio that offers an income return that is double the rate of inflation.

Value opportunity

As well as a relatively high income return, the index also seems to offer good value for money. Its dividend yield suggests that it could generate further capital growth - especially since a number of its global peers offer far lower yields at the present time.

Indeed, a number of the index's major sectors seem to be undervalued at the moment. For example, the banking sector makes up 12.7% of the index by weighting. Even though many of its constituents now have stronger balance sheets and increasingly positive profit and dividend growth outlooks, their valuations suggest that they remain unpopular.

Similarly, oil & gas and resources shares make up a quarter of the index by weighing. Although the oil price and other commodity prices have experienced an improved period, there could be further to go in terms of price rises. This could lead to higher dividends and stronger investor sentiment over the long run.

Relative appeal

With interest rates set to remain low over the medium term, the appeal of other assets from an income investment perspective seems limited. Bond yields are relatively low when compared to dividend yields, while cash continues to offer a negative real return. Property investment remains challenging, with recent developments in the mortgage market making it tougher to put in place a buy-to-let mortgage.

As a result, the appeal of the FTSE 100 remains high. Certainly, investors may have missed out on the near-2,000 point gains of the last decade, with the index enjoying a prolonged bull market. But with what seems to be a low valuation and upbeat future prospects, buying dividend stocks now could prove to be a shrewd move in the long run.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.