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Have £1,000 to invest in the FTSE 100? I’d buy these 2 cheap dividend stocks in an ISA today

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The recent performance of the FTSE 100 has been highly volatile. Fears surrounding the prospect of a full-scale global trade war are causing investors to adopt an increasingly risk-averse attitude. This could lead to further instability over the coming months.

As such, now could be a good time to buy FTSE 100 dividend stocks. They may offer wider margins of safety than they have in the recent past, while their yields may be more enticing than earlier in the year.

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With that in mind, here are two large-cap dividend stocks that could deliver improving total returns over the long run.

Next

While investing in retail shares such as Next (LSE: NXT) may seem to be a risky move, the company is delivering impressive financial results. Its sales and profit outlook is more positive than for many of its sector peers, with it having a strategy in place that is allowing it to adapt to changing consumer tastes.

For example, Next is investing in its online growth opportunities. This involves investment in its supply chain, as well as in a slicker website. It is also seeking to capture a growing proportion of leisure spending, which will align it more closely with a consumer who is increasingly favouring leisure spending over retail spending.

Since the stock trades on a price-to-earnings (P/E) ratio of 12.8, it seems to offer good value for money. While its dividend yield of 2.9% may not be among the highest in the FTSE 100, it is covered 2.7 times by net profit. This suggests that there is scope for rapid dividend growth – especially if the company’s operating conditions improve.

Barratt

The prospects for housebuilders such as Barratt (LSE: BDEV) are also uncertain at the present time. The industry faces a highly changeable political and economic outlook. Since a large proportion of sales of new homes have been through the government’s Help to Buy scheme, changes to the programme could have a negative impact on investor sentiment towards the industry.

However, that risk appears to have been priced in to Barratt’s valuation. The stock trades on a P/E ratio of just 9.3, despite it continuing to report robust demand for new homes. Given the lack of supply of new homes compared to demand, it may enjoy stronger operating conditions than its valuation suggests.

In terms of dividend appeal, Barratt currently yields around 4.3%. However, this does not include plans to return £175m of cash in the current year. This will be distributed through a mixture of share buybacks and dividends, which is likely to result in a higher income return for the company’s investors over the medium term.

As such, now could be the right time to buy a slice of the business. With a low valuation and a high yield, the stock could outperform the FTSE 100 in the long run.

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Peter Stephens owns shares of Barratt Developments. 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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