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£1k to invest in an ISA? 2 dirt-cheap FTSE 100 dividend stocks I’d buy to retire early

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As private investors, we have several big advantages over City fund managers. One is that we don’t have to explain our results to impatient bosses every three months. But another valuable benefit of the DIY approach is that by investing in an ISA, we can enjoy tax free profits.

Today, I want to look at two FTSE 100 dividend stocks I think look cheap for long-term investors.

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Tax-free passive income

You can invest up to £20,000 in ISA accounts each year. This money can be split between a Cash ISA and a Stocks and Shares ISA in any way you please. Any future capital gains or income will be completely free of tax.

For me, one of the main reasons to invest in an ISA is that I can avoid tax in the future. My focus is on building a portfolio of dividend stocks that’ll provide me with a passive income when I retire.

Keeping these stocks in an ISA should mean when I start to withdraw income from my portfolio, it’ll all be tax free. Unlike a regular pension, I won’t have to pay income tax.

How I’d invest in an ISA

One stock I think should be a great long-term income holding is FTSE 100 defence group BAE Systems (LSE: BA). Although this company faces political and operational risks from time to time, it always seems to find a way of handling them. As a result, BAE’s dividend hasn’t been cut for more than 25 years.

Indeed, shareholders have enjoyed very strong income growth over this time. In 1995, the dividend was just 3.1p per share. In 2019, it was 23.2p per share, an increase of nearly 650%.

If you’d bought BAE shares at the start of 1995, you’d have paid about 120p. This means that today, your original investment would be paying you an income of more than 18% each year.

BAE’s trading has been disrupted by Covid-19 this year, but the company said recently that most operations are now returning to normal. City analysts only expect a small hit to profits this year and are forecasting earnings growth of around 10% in 2021. I believe this should protect the group’s dividend.

At the time of writing, BAE shares were trading at around 490p. That gives a forecast dividend yield of 4.5% for 2020, rising to 5.1% in 2021. I see BAE as an excellent ISA investment at this level.

This miner could profit from Covid recovery

FTSE 100 mining group Anglo American (LSE: AAL) is another stock I’d hold in an ISA. The group is one of the world’s largest diamond producers, through its De Beers subsidiary. This business has suffered from the global lockdown as worldwide sales of diamond jewellery have slumped.

However, many diamond purchases are for major life occasions, such as weddings. I suspect these have been delayed, not lost altogether. As markets recover, sales should improve. In the meantime, the group’s copper, platinum, and iron ore operations are all working well, supporting earnings.

Copper and platinum could also do better next year, as spending returns to industrial markets. Analysts expect Anglo’s profits to bounce back in 2021. Consensus forecasts put the stock on less than 10 times 2021 earnings, with a dividend yield of 4.3%. I think this could be another good stock to tuck away in an ISA.

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Roland Head owns shares of BAE Systems. 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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