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Forget a Cash ISA: I’d aim to beat the State Pension with these 2 FTSE 100 dividend shares

Peter Stephens
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With the State Pension age set to increase, building a nest egg for retirement is becoming increasingly important for many people.

However, with the returns on a Cash ISA averaging around 1%, saving money to fund retirement may prove to be inadequate. In fact, if Cash ISA interest rates continue to sit below inflation, it may be that the spending power of your retirement fund declines.

As such, now could be the right time to buy FTSE 100 shares that offer income potential and low valuations. Here are two prime examples that could help you to beat the State Pension.

Lloyds

With Lloyds (LSE: LLOY) having become increasingly UK-focused following the financial crisis, it could experience an uncertain period as Brexit moves ahead. Consumer confidence is weak, UK GDP growth has recently been downgraded, and investors seem to be pricing-in a difficult financial period for the business.

As a result, the stock currently trades on a forward price-to-earnings (P/E) ratio of just 6.5. This is relatively low – even within a banking sector that is unpopular among investors at the present time.

Unlike many of its sector peers, though, Lloyds has been able to significantly reduce costs over the last decade so that it is more efficient than many of its FTSE 100 rivals. Moreover, it plans to improve its efficiency still further in order to become increasingly competitive over the medium term.

With the stock offering a dividend yield of 7.5% for the current year, and that is due to be covered more than twice by net profit, its income investing potential may be stronger than many investors realise. As such, now could be the right time to buy it for the long term.

BAE

Also facing an uncertain period is aerospace and defence company BAE (LSE: BA). Its shares have declined by 12% in the last year. During that time, the company has underperformed the FTSE 100 by 7%, as investors have become increasingly concerned about the geopolitical risks facing its key customer, Saudi Arabia.

BAE may also be susceptible to the political risks surrounding the UK in the short run. The prospect of a general election and Labour victory may mean that investors demand a wide margin of safety in the near term.

However, with its recent results showing that it is delivering improving financial performance, now could be an opportune moment to buy the stock. It currently trades on a P/E ratio of 11.8, while a dividend yield of 4.3% indicates that its total returns could be relatively high in the long run.

Although there is the potential for a volatile period for investors, BAE has the potential to deliver significantly higher returns than a Cash ISA for patient investors. In doing so, it may help you to overcome the State Pension’s shortfall and build a large nest egg for retirement.

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Peter Stephens owns shares of BAE Systems and Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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 2019