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Forget a Cash ISA! I’d buy these cheap FTSE 100 dividend stocks instead

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Obtaining an income return that’s greater than a Cash ISA isn’t especially difficult at present. Indeed, the FTSE 100’s yield of 4.5% is around three times that of even the very best ISAs currently available.

However, it’s possible to generate an even higher yield than the FTSE 100 through buying individual shares that offer wide margins of safety.

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Here are two prime examples, with the companies offering strong growth strategies and low valuations that could allow them to deliver high capital growth in the long run.

Lloyds

The Lloyds (LSE: LLOY) share price has experienced a volatile 2019 so far. The FTSE 100 banking stock made gains in the first few months of the year to reach 66p, before dropping back in recent weeks to 57p. In the short term, further uncertainty could be ahead as a result of its almost exclusive exposure to the UK at a time when the prospects for the economy continue to be challenging.

As such, this could prove to be an opportune time for long-term investors to buy shares in the bank. It currently trades on a price-to-earnings (P/E) ratio of 7.5, while its dividend yield is 6.3%. These figures suggest investors are expecting a decline in its financial performance that may not ultimately be recorded.

In fact, with Lloyds having lowered its costs and strengthened its balance sheet since the last major recession, it could be in a relatively good position to face an uncertain near-term outlook. Therefore, it may offer a potent mix of value and income investing potential for the long term.

British American Tobacco

Also facing an uncertain period is British American Tobacco (LSE: BATS). The company’s cigarette volumes are continuing to decline, with the wider tobacco industry seeing a gradual shift of smokers towards products such as e-cigarettes. This trend is expected to continue in the medium term, and may present a growth opportunity for the business as further options become available to consumers.

Of course, cigarettes are still expected to remain the dominant method of nicotine delivery over the next decade. As such, the pricing power enjoyed by British American Tobacco may mean it’s able to deliver a rising dividend over the coming years. Since it has a yield of 7.6%, this could mean its total returns are highly impressive even without the prospect of capital growth being factored in.

Since the company has invested heavily in next-generation products, it could be in a good position to capitalise on their increasing popularity as consumers seek less harmful alternatives to cigarettes. With a strong balance sheet and falling debt levels, the stock appears to offer an attractive risk/reward opportunity for long-term investors. As such, now could be the right time to buy a slice of it.

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Peter Stephens owns shares of British American Tobacco and Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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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