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Retirement savings: why I’d buy FTSE 100 dividend shares in an ISA today

Building a nest egg that can provide a passive income in retirement is an achievable goal for any investor. Even with modest investment, it is possible to enjoy improved financial freedom in older age through tax-efficient, regular investing in FTSE 100 dividend stocks.

Not only do they appear to offer good value for money at the present time, they have a solid track record of growth. As such, now could be the right time to add them to your ISA and look ahead to the prospect of an improved income in retirement.

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Buying opportunity

How the stock market will perform in the coming months is highly uncertain. Risks such as political uncertainty in the US, the ongoing global trade war and Brexit could pan out in a variety of different ways.

However, the valuations that are present across the FTSE 100 suggest that investors are expecting a period of difficulty. This could present a buying opportunity for long-term investors that enables them to generate impressive returns over a sustained period through purchasing shares at a wide discount to their intrinsic values.

For example, around a quarter of the FTSE 100’s members currently offer a dividend yield that is in excess of 5%. This could mean that a portfolio of dividend stocks would not need to deliver an especially high rate of capital growth in order for it to outperform the wider index’s historic high-single-digit annualised total returns.

Long-term growth

As well as offering low valuations at the present time, the FTSE 100 could deliver strong growth over the long run. Its status as an index that is dependent upon the global, rather than local, economy provides it with access to growth rates that could surpass those seen in the UK. As such, its members may be able to generate relatively high rates of return for their shareholders, as their improving financial performance translates into rising dividends.

Furthermore, with the future trajectory of global interest rates expected to be downward due to lingering concerns about near-term risks, FTSE 100 dividend shares could become increasingly attractive relative to other income-producing assets. This may lift investor demand for large-cap dividend shares, since they may be able to offer a more reliable income stream than smaller businesses that lack their size, scale and geographic diversity.

ISA potential

Investing in FTSE 100 dividend shares through an ISA is a cost-effective and simple means of maximising your income and capital growth. The annual cost of an ISA is little more than the commission on one trade in many cases, while its tax efficiency can have a significant impact on total returns over the long run.

As such, for anyone looking to build a retirement nest egg, buying a diverse range of FTSE 100 income shares through an ISA could be a sound move that leads to a sustainable passive income in older age.

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Peter Stephens has no position in any of the shares mentioned. 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.