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Forget Cash ISAs and buy-to-let. I’d buy FTSE 100 dividend stocks for a retirement income

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Generating a retirement income from FTSE 100 shares may seem to be a risky move at the present time. A number of large-cap stocks have postponed their dividends, while the challenging economic outlook could mean dividend growth is somewhat lacking in the coming months.

However, with other options such as Cash ISAs and buy-to-let also facing difficult futures, FTSE 100 dividend stocks could be the best means of obtaining an inflation-beating income return from your retirement savings in the coming years.

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FTSE 100 dividend prospects

The choice available for income investors within the FTSE 100 may be more limited than it was prior to the coronavirus pandemic. But there are still a number of companies that offer attractive returns. In fact, it’s possible to build a portfolio of stocks that currently yields in excess of 4%, or even 5%. With many companies currently trading on low valuations, investors may even be able to obtain higher yields over the medium term.

Although dividend growth could be slow, or even non-existent, in the short run, the track record of the world economy suggests that a recovery is likely over the long run. Therefore, buying high-quality FTSE 100 businesses with affordable dividends and strong balance sheets could be a means of obtaining an inflation-beating rate of income growth as the world economy gradually returns to positive growth.

FTSE 100 growth potential

As well as offering a relatively attractive income return today, the FTSE 100 could deliver capital growth in the long run that makes it a worthwhile investment for individuals who aren’t yet close to retirement. They may be able to purchase large-cap shares while they trade on low valuations. Over time, they could recover as investor sentiment improves and their bottom lines move higher. This could lead to a larger nest egg that provides a more attractive passive income in older age.

With the index having produced an annualised return of over 8% in its 36-year history, its long-term recovery potential from the current crisis certainly seems to be high. In fact, it’s successfully recovered from every one of its previous bear markets to produce new record highs. And a  similar outcome is highly likely after its current challenges.

Relative appeal

Of course, Cash ISAs may offer greater security than FTSE 100 dividend stocks. However, the very low interest rates on offer mean that you require a large amount of capital to generate even a modest passive income.

Buy-to-let investing, meanwhile, may be less attractive than it has been over the past decade. The prospect of slow rental growth, extended void periods and capital losses could mean that buying FTSE 100 dividend stocks is a more profitable and simpler strategy to generate a retirement nest egg, or to provide a 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.

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