Why I’d ditch a Cash ISA and buy these 2 FTSE 100 dividend stocks right now

I think a higher income return could make these two FTSE 100 (INDEXFTSE:UKX) stocks more enticing than a Cash ISA.

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Even though Cash ISAs offer an interest rate of just 1.5% at the very most, they remain more popular than a Stocks and Shares ISA. Cash ISA subscribers, though, may be missing out on the dividend growth prospects of a number of FTSE 100 shares. In many cases, they appear to be highly appealing at the present time – even though the index has made gains in recent months.

With that in mind, here are two large-cap shares that could provide a far more attractive income return than a Cash ISA. They may also be able to offer capital growth potential as a result of their valuations.

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BAE Systems

While the prospects for the defence sector have improved in the last couple of years, the share price of BAE Systems (LSE: BA) has moved lower. In fact, it has declined by 23% in the last year, which suggests that investors are downbeat regarding its financial prospects.

Of course, the company relies on Saudi Arabia for a large part of its sales and profit. Although BAE’s recent update showed that it has exposure to a variety of other markets, its near-term performance could be significantly impacted by an increase in the geopolitical risks facing the country. As such, the risk of capital losses remains in place in the short run.

However, with the company having reported relatively stable financial performance over the last decade, it seems to be in a stronger position than many of its sector peers. As defence industry spending is forecast to rise at an increasing pace over the next handful of years, the stock could enjoy improved operating conditions. As such, with a dividend yield of 4.8% that is covered twice by profit, it seems to have an attractive risk/reward ratio.

Micro Focus

While Micro Focus (LSE: MCRO) may not appear to be an obvious choice for income-seeking investors, the company’s 3.5% dividend yield could become increasingly attractive over the long run.

In its recent update, the international software product group reported that it is making progress in delivering its turnaround plan. It is rationalising its asset base, while also seeking to return cash to shareholders where possible through dividends and share buybacks. Alongside this, the business is aiming to reduce leverage in order to offer a less volatile long-term shareholder experience.

With dividends being covered twice by profit, it seems to offer relatively high headroom compared to some of its index peers. Since the stock is forecast to post a rise in earnings of 4% in the current year, it could offer fair value for money while it has a price-to-earnings (P/E) ratio of 14.4.

Clearly, there are less risky income investing opportunities in the FTSE 100 than Micro Focus. But with the stock having continued recovery potential, it could be appealing for less risk-averse investors.

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Peter Stephens owns shares of BAE Systems and Micro Focus. The Motley Fool UK has recommended Micro Focus. 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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