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£5,000 to invest? 2 cheap FTSE 100 shares I’d buy in an ISA to beat the State Pension

Peter Stephens
·3-min read
Senior couple at the lake having a picnic
Senior couple at the lake having a picnic

The FTSE 100’s recent stock market crash has led to greater caution among many investors. As such, they may consider buying other assets when seeking to build a retirement portfolio that can reduce their reliance on the State Pension.

However, the index’s low price level could mean there are buying opportunities on offer. Over time, they could produce impressive returns that improve your prospects of generating a generous passive income in older age.

With that in mind, here are two large-cap stocks that appear to offer good value for money and long-term recovery potential after their recent declines. They could boost your retirement prospects as part of a diverse range of stocks.

A FTSE 100 turnaround opportunity

FTSE 100 oil and gas shares such as Shell (LSE: RDSB) have experienced a hugely challenging 2020. The deteriorating prospects for the world economy have led to a declining oil price. This is having a negative impact on the company’s financial performance.

In response, the business is cutting up to 9,000 staff members as part of a wider plan to reduce costs. For example, it reduced operating expenditure by $1.1bn and capital expenditure by $1.4bn in the most recent quarter. As well as this, it is aiming to shift its investment focus towards low-carbon assets that could help it to generate a more sustainable rate of profit growth over the long run.

Looking ahead, Shell’s uncertain operating conditions could make it a more volatile stock than many of its FTSE 100 index peers. However, its 58% share price decline since the start of the year could mean that investors have factored in many of the risks it faces. As such, with cost reductions and a change in strategy ahead, it may offer long-term recovery potential.

A large-cap income opportunity

Many FTSE 100 shares have cut their dividends this year. As such, defensive stocks such as British American Tobacco (LSE: BATS) could become more popular in a low-interest-rate environment.

The company has a yield of around 8%. It appears to be affordable, with the firm targeting a 65% dividend payout ratio. Its defensive business model may also make it more appealing in an era of economic uncertainty.

British American Tobacco continues to invest in non-combustible products such as e-cigarettes that could gradually account for a greater share of its revenue. Already, they contribute around 10% of its sales and could provide a long-term growth opportunity for the business.

The company’s stable earnings growth forecasts may increase its appeal among investors at a time when many FTSE 100 shares are struggling to post positive sales and profit growth. As such, it could offer impressive total returns in the coming years through rising demand for its shares and the reinvestment of its generous dividend payouts.

The post £5,000 to invest? 2 cheap FTSE 100 shares I’d buy in an ISA to beat the State Pension appeared first on The Motley Fool UK.

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Peter Stephens owns shares of British American Tobacco and Royal Dutch Shell B. 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.

Motley Fool UK 2020