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Forget buy to let! I’d buy these 2 FTSE 100 dividend shares yielding 7% in an ISA today

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You can still get yields of up to 8% from buy-to-let property in some areas of the country, but that excludes other costs of running the business, such as maintenance, tax and management fees.

When you add in these additional charges, the actual return received is likely to be a lot less.

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With that in mind, today I’m looking at two FTSE 100 dividend shares that both yield more than 7%. If you hold them within an ISA, there’s no additional tax to pay, which could make them better investments than buy-to-let over the long term.

Sector giant

My first pick is the financial sector giant Legal & General (LSE: LGEN). At the time of writing, shares in this life insurance, pensions and asset manager currently support a dividend 6.4%, rising to 6.8% next year based on current City forecasts.

The shares also trade at an extremely attractive valuation of just 8.8 times forward earnings, which, in my opinion, is a steal for this high-quality business.

Legal’s size is the primary reason why I think it could be a better investment than buy-to-let over the long term. The company is one of the largest financial services groups in the UK, which gives it a considerable advantage over competitors. Customers are more likely to trust the business with their pension savings because of its size and liquidity. It is highly unlikely that this business will ever implode and take savers’ money with it.

As the world gets richer, and more people take out pensions and insurance products, Legal should continue to expand, and investors should see this growth through both a higher share price and rising dividends.

Emerging market play

Rio Tinto (LSE: RIO) is my other FTSE 100 income giant that I believe could be a better buy than rental property. The global population is only expanding, and all these people need somewhere to live. As the world’s largest producer of iron ore, a key component of steel, Rio is a vital part of the supply chain for the construction industry.

Demand for this product is only going to increase as the world continues to grow, and Rio’s size and experience mean that it can produce iron ore at a lower cost than anyone else. This is fantastic news for shareholders. Indeed, over the past few years, the company has become a dividend champion as it has returned tens of billions of dollars in excess cash to shareholders.

Analysts believe this trend will continue. They have the stock yielding 8.6% in 2019 and 6.8% in 2020.

Once again, despite its attractive income credentials, shares in Rio look dirt cheap at current prices. Shares in the mining giant are currently changing hands at just 8.1 times forward earnings.

Considering the company’s international diversification, cash generation and future potential, this valuation severely undervalues the business. Buy-to-let property just does not offer the same kind of attractive investment qualities.

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Rupert Hargreaves owns no share 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.

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