Forget the Cash ISA! I’d buy these FTSE 100 dividend stocks yielding 6.6%+

Roland Head reveals two of his top FTSE 100 (INDEXFTSE: UKX) income picks.

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Are you fed up with ‘best buy’ Cash ISA accounts that only pay 1.5% interest?

Although I think some cash savings are essential for rainy days and short-term spending commitments, I don’t think cash is a good way to generate an income or build wealth.

If you’re looking for a long-term home for some spare cash, I think there are much better opportunities in the FTSE 100. Today I’m going to look at two of my top dividend picks from the blue-chip index.

And don’t forget, you can still enjoy the tax-free protection of a Cash ISA by investing in a Stocks and Shares ISA.

New boss, new plan

Aviva (LSE: AV) has been unpopular with investors over the last year, but I continue to believe that this company’s cash generation makes it a good choice for income investors.

The group now has a new boss, Maurice Tulloch. He’s been with Aviva for 27 years and has previously headed up both its international business and its UK general insurance operations.

Mr Tulloch should have a very good understanding of the business. So I was interested when he recently announced plans to split Aviva’s UK life insurance and general insurance operations.

Mr Tulloch says that the change is necessary to “crack Aviva’s complexity … which has held back our performance for too long”.

It’s certainly true that one repeated criticism of this business has been that growth is slow and inconsistent.

Splitting up the business may be one way to address this. After all, Aviva is much larger than most rivals. In 2018, it had 33m customers and paid out £32.9bn in claims. It’s not realistic to expect a business of this size to grow quickly, in my opinion.

Mr Tulloch’s strategy isn’t guaranteed to succeed. But I think that Aviva’s current share price already reflects a pretty cautious view. The stock trades below its net asset value of 424p per share, on a forecast price/earnings ratio of just 6.8%. The dividend yield of 7.7% looks high, but should be covered 1.9 times by earnings and backed by cash flow.

I rate Aviva as one of the top dividend buys in the FTSE 100 at the moment.

Focus on pensions

Corporate pensions get a mixed press, but the reality is that they are still big business.

Thanks to its size, Legal & General Group (LSE: LGEN) has been able to buy out a number of multi-billion pound company pension schemes in recent years, freeing employers from costly final salary schemes. The latest of these is a £4.6bn deal with Rolls-Royce, covering 33,000 current pensioners.

The group’s scale means that it can invest in long-term opportunities requiring sizeable upfront investment, such as property and infrastructure. The group’s asset management division now has more than £1trn of assets under management. These assets should then provide cash to meet future pension payments.

Of course, such huge scale carries a risk of complacency. The firm could see returns fall if its investment criteria are relaxed too much. Fortunately, I can see no sign of this yet. Return on equity last year was 22.7%, ahead of its five-year average.

Cash generation is good and the dividend has doubled since 2013. This year’s payout is expected to rise by 7% to 17.6p, giving a forecast yield of 6.6%. I rate the shares as a buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Aviva. 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.

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