Forget the cash ISA: I believe these FTSE 100 dividend stocks are a much better buy

A person holding onto a fan of twenty pound notes

According to moneysavingexpert.com, the highest interest rate on offer today from a cash ISA is just 1.4%. After deducting the impact of inflation (2.7%), this implies a real interest rate of -1.3%. 

If you’re fed up with the pitiful interest rates available on cash savings, I believe that investing your money is the best way to jump-start your returns. And today, I’m looking at two blue-chip stocks that I think are perfect income investments for investors of all types.

Slow and steady

Financial services group Admiral (LSE: ADM) is one of my favourite FTSE 100 stocks. Over the past few decades, this business has grown from a start-up into one of the UK’s largest companies, and it’s now trying to expand overseas. 

During the past few years, management has devoted an enormous amount of time and effort into growing its presence across Europe and the United States. So far, these endeavours have yet to yield a profit, but I’m optimistic that it’s only a matter of time before Admiral hits this critical milestone. Indeed, sales at its international businesses have nearly doubled over the past three years, and losses have declined by 40%.

At the same time, the company is expanding into new markets here in the UK. The group recently launched Admiral Loans which, in its first year of operation, is “comfortably beating” management’s expectations for growth.

It’s these growth initiatives that get me excited about Admiral’s prospects. The legacy car insurance business is chugging along and producing steady profits. But the UK car insurance market is already highly competitive and I see this part of the company as more of a cash cow than growth engine. 

The lack of growth isn’t exactly bad news as profits from Admiral’s UK insurance business are funding hefty dividends. City analysts believe the stock will yield 5.8% for 2018, and 6.4% for 2019, with further growth likely in the years after as the company’s diversification efforts pay off.

Record profits

Another dividend champion that’s on my ‘buy’ list is global mining giant Rio Tinto(LSE: RIO). What I really like about this company is that it’s committed to returning all excess profit, after capital spending, to investors. 

At the beginning of August, Rio reported a first-half profit of $4.4bn, up 33% on the previous year, allowing it to announce an interim dividend of $1.27 per share, “the highest in the company’s 136-year history,” according to CEO Jean-Sebastien Jacques.

Going forward, the City is expecting more of the same. A full-year dividend payout of $2.8 (215p) per share is anticipated, implying a final distribution of $1.53 per share is still to come. 

Considering that the company is on a record-breaking streak, and last year its dividend totalled $3 per share for the full year, I wouldn’t be surprised if it announces a bigger than expected final distribution.

On current expectations, the shares will yield 5.9% for 2018, falling slightly to 5.6% for 2019, which is still significantly above the FTSE 100 average. On top of the attractive dividend yield, shares in the iron ore miner are changing hands for just 9.8 times forward earnings. 

With a valuation like that, and market-beating dividend yield on offer, I’m confident that Rio will prove itself to be a fantastic substitute for your cash ISA.

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Rupert Hargreaves owns shares in Admiral. 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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