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Forget Cash ISAs and buy-to-let. I’d buy cheap FTSE 100 dividend stocks in an ISA today

Obtaining a passive income from FTSE 100 dividend stocks has become more challenging in 2020. Many companies have been forced to cancel their dividends this year due to coronavirus, which leaves less choice for income-seeking investors.

However, with Cash ISAs offering low income returns and the prospects for buy-to-let being highly uncertain, the FTSE 100 could offer a relatively attractive income opportunity over the long run.

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As such, now could be the right time to buy cheap, financially-sound FTSE 100 stocks in a Stocks and Shares ISA for the long term.

FTSE 100 dividends

Although a relatively large number of FTSE 100 stocks are not due to pay dividends this year, many large-cap shares continue to plan to make shareholder payouts in the short run. They include businesses that have defensive characteristics, which are less affected by a global economic slowdown than their index peers.

With investor sentiment towards equities being relatively weak at the present time, it is possible to buy FTSE 100 dividend shares at low prices. This means that they offer higher yields than they have done in the past few years in some cases, which presents the opportunity to obtain a generous income return over the long run.

Relative appeal

Obtaining a generous income return outside of the FTSE 100 has also become much more challenging in recent months. Cash ISAs, for example, now offer exceptionally low returns due to a fall in interest rates to historic lows. There is also the potential for negative interest rates should the economy require further monetary policy stimulus. As such, savers may yet experience further difficulties in generating a return from their Cash ISAs over the coming years.

Buy-to-let investments may also fail to provide a worthwhile income return – especially on a net basis. An economic downturn seems likely to dampen rental growth, and could even lead to longer void periods for landlords should unemployment rates rise rapidly. And, with tax changes causing the net returns available to property investors to be less attractive than they have been over recent years, the sector may lack income appeal compared to FTSE 100 dividend stocks in the long run.

Selecting FTSE 100 stocks

Choosing which FTSE 100 stocks to buy can be a difficult process during a period of economic uncertainty, when profit warnings are likely to be fairly common. However, by diversifying across a range of sectors, picking stocks with solid balance sheets, and selecting those businesses with defensive appeal, you can generate a sound passive income over the long run.

Furthermore, with many FTSE 100 dividend stocks being cheap at the present time, there may be capital growth potential on offer. This could boost the size of your portfolio and make the task of earning a generous income easier over the coming years.

A top income share that boasts a reliably defensive business model… plus a current forecast dividend yield of 4.2% to boot!

With global markets in turmoil as the coronavirus pandemic tightens its grip, turning to shares to generate income isn’t as simple as it used to be…

As the realities of ‘life under lockdown’ begin to bite, many of the stock market’s ‘go-to’ high-yielding companies have either taken an axe to their dividend pay-outs… or worse, opted to suspended them altogether – for the near-term at least.

With so many blue-chip and mid-cap companies scrambling to hoard cash right now, where are we income investors to turn for decent yields?

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*Please be aware that dividends are variable and not guaranteed.

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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.