Can investors still look to the FTSE 100 for income?

The search for income is an ongoing challenge for investors. Many have turned to well-known FTSE 100 companies to deliver income. But with stockmarket volatility and fears of dividend cuts, is the time still right to look to the FTSE 100 for income?

Global markets are in a period of reflection following a stint of downward-trending volatility. The Chinese economy has seen its stockmarket bubble burst.

Global conflict, the dramatic fall in commodity prices and a general slowing of growth has resulted in worldwide markets continuing their decline into the start of 2016.

The UK is no exception, with the FTSE 100 dropping from a yearly high of 7,122 in April 2015 to a low of 5,499 in February 2016. It is now hovering above the 6,000 level. How markets will act in the remainder of 2016 is anyone's guess, but what does all this mean for those seeking income?

Note of caution on dividend yields

As at the time of writing the FTSE 100 dividend yield stands at around 4.2%, far better than the current return from bank deposits. However, investors should be cautious as the dividend yield can hide a multitude of sins.

For one, the dividend yield is a backwards looking measure, comparing a company's current share price to the dividends they paid over the last year.

When share prices fall, this can have the effect of artificially boosting the dividend yield, as dividend cuts are not immediately reflected in the dividend yield calculation.

Several of the firms hardest-hit by overall share price falls still maintain their dividendsFor example BHP Billiton, Standard Chartered and Glencore are all currently showing dividend yields with double digits.

However, expecting a double-digit return in the next year would be foolish, as all these companies have seen significant falls in their share prices and all have announced dividend cuts. This won't be reflected in the dividend yield until they are actually paid out.

A number of other companies are also expected to cut their dividends in 2016, especially those in sectors that have suffered from the economic downturn, including miners, oil & gas producers and retailers.

It is anticipated that the average FTSE 100 dividend yield will fall over the next 12 months towards a 3% level. On a positive note, some of those companies cutting their dividends will still offer a relatively high yield based on current share price valuations.

Where a company's share price has fallen by half, as is the case with BHP Billiton since 2014, cutting the dividend by 75% will still result in an annual income of between 2.5% to 3%.

If you're investing for the long term, underlying capital volatility shouldn't be too concerningOn the other hand, a number of companies impacted by the overall fall in share prices are maintaining their dividends.

For instance HSBC, which is currently yielding above 7% based on its current share price, announced that dividends would be maintained just above their current levels.

Whilst there are some underlying concerns around HSBC's revenue and its close links to Asia, investors will be rewarded in the interim with a strong yield.

Is the time right to invest for income?

So is it the right time to invest for income? Well it's certainly better to invest now than it was in April 2015 when markets and share price valuations were much higher.

Of course there is likely to be continued volatility, whilst China rebalances and the UK heads towards a referendum on its European Union membership, but if you are investing for the long term then underlying capital volatility shouldn't be overly concerning.

Investors should select firms with consistent and ideally progressive dividend policiesThe key is to build a portfolio of equities which will offer a sustainable income, without excessive volatility.

A portfolio of around 20 FTSE 100 equities, split across a number of industry sectors, will be concentrated enough to offer a higher than average yield, but sufficiently diverse to provide protection against specific sector volatility.

However, it's important not to just choose the highest dividend payers - see which companies have consistent and ideally progressive dividend policies.

Avoid too much concentration in one sector; a portfolio heavily overweight in mining stocks, oil producers or banking stocks could have seen high volatility in income levels. Finally, investors should avoid the temptation to over-trade; frequent dealing costs can make a dent in their income.

It must also be remembered that, from 6 April 2016, the government is altering the rules for dividend taxation, such that if shares are held directly, investors will be able to benefit from a dividend tax allowance of £5,000.

This means that no tax will be payable on the first £5,000 of dividend income received, a tax-efficient way for investors to increase their level of income.

Ben Pears is director of investment strategy at Synergy Financial Products Limited.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.