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Forget a Cash ISA! I’d invest £20k in these 2 FTSE 100 dividend champions yielding 5%

The best flexible Cash ISA on the market at the moment offers an interest rate of just 1.36%, which pales in comparison against the FTSE 100’s 4.5% dividend yield. 

Considering these numbers, I think investing in the FTSE 100 could be a much better idea than opening a Cash ISA, and today I’m going to highlight two FTSE 100 dividend champions that I would buy if I had £20k to invest in an ISA. 

Booming market

The global travel and tourism market is booming. Last year the market grew 3.9%, compared to 3.2% for global GDP, marking the eighth successive year when the travel and tourism industry has grown faster than the global economy. 

As one of the largest travel companies in Europe, Tui Travel (LSE: TUI) is riding this growth wave. Indeed, between 2013 and 2018, the company’s normalised earnings per share jumped from €0.32 to €1.32, a compound annual growth rate of 26.6%.

I think it is unlikely that this rate of growth will continue, but I’m optimistic that Tui’s size and reputation with customers will help it grow faster than the rest of the market. 

Analysts believe the tourism market will continue to expand faster than global GDP for the foreseeable future, as consumers spend more and more travelling the world.

This suggests that TUI’s earnings could grow by at least 4% per annum over the long term. Coupled with the company’s current 4.4% dividend yield that implies investors can look forward to an 8.4% total annual return for the foreseeable future. 

The grounding of Boeing’s 737 Max jets is expected to hit Tui’s growth in 2019. However, the company is likely to return to growth the next year, according to the City. 

Analysts have pencilled in earnings growth of 43% for fiscal 2020, and the dividend is expected to rise as well, hitting €0.67 per share, giving a dividend yield of 5.5% on the current share price.

Undervalued

Sticking with the travel market, my next FTSE 100 income pick is British Airways owner IAG (LSE: IAG). The airline business can be an unpredictable one, but it looks as if IAG has cracked the code.

By focusing on keeping costs low and growing through acquisitions, IAG’s net profit has surged. City analysts are forecasting a net profit of €2.2bn for 2019, up from just €122m in 2013

And it doesn’t look as if the company is going to slow down any time soon. At the beginning of November, the group announced that it had signed an agreement to purchase Spanish carrier Air Europa. The €1bn deal will give the group a foothold in the Latin American market, as well as better economies of scale as IAG already owns Spain’s two biggest airlines, Iberia and Vueling.

Management wants to use this stable of carriers to turn Madrid into one of the world’s largest aviation hubs. Considering IAG’s successful track record of buying and integrating airlines into the broader group, I think it will succeed.

Further growth could be great news for shareholders and income seekers. As IAG’s profits have ballooned, so has the company’s dividend to investors. This year the business will distribute €0.33 per share in dividends, up from €0.18 in 2015, according to analysts. That’s a dividend yield of 5.2% on the current share price. 

On top of this market-beating dividend yield, the stock also trades at a highly attractive valuation of just six times forward earnings.

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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.