Here’s how I could invest £5k in a Stocks and Shares ISA to get £450 income a year 

I’m sifting through my final Stocks and Shares ISA choices and this super-high-yielding FTSE 100 insurer looks very appealing to me.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

2023 concept with a lightbulb replacing the zero

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

I’m looking for FTSE 100 companies to generate tax-free income inside my Stocks and Shares ISA allowance, and there are some startling yields out there.

Close life assurance fund consolidator Phoenix Group Holdings (LSE: PHNX) now yields a staggering 8.91% a year, the second highest on the index.

Phoenix sinking

Better still, that income is free of tax inside my annual ISA allowance. If I invested £5,000 at today’s yield I would get £455.50 in the first year alone. Any share price growth would be on top of that (although Phoenix could just as easily fall given today’s uncertainties). But is that yield sustainable?

Phoenix built its business by purchasing legacy life insurance and pension funds, then managing them on behalf of members. It’s not exciting, but the fees keep rolling in.

It now has more than 12m policyholders and has been expanding by acquiring businesses too. It now owns Standard Life, ReAssure, and Sun Life of Canada UK.

This has done precious little for the share price, though, which is down 13.63% over one year, and 21.86% over five.

It dropped 12% last week after posting a pre-tax loss of £2.26bn on Monday. That follows a loss of £688m the year before. What’s going on here?

One problem with legacy funds is that they eventually run down. Another is that they’re still exposed to stock market volatility, and every fund manager struggled last year. Phoenix saw assets under management fall from £310bn to £249bn, which knocks percentage-based management fees.

Yet Phoenix still generated £1.5bn of cash, just beating its own target. It’s also sitting on £12.1bn of Group in-force long-term free cash, which will be released over time to ensure its “growing dividend is sustainable over the very long term”.

The dividend is safer than it looks

This allowed CEO Andy Briggs to hike the dividend 5%, which boosts my confidence in its sustainability. Shareholder payouts have now increased for 14 consecutive years, which includes the pandemic. While dividends are never guaranteed and can be cut at any time, this one looks safer than most. It’s covered 1.6 times by earnings.

In a further boost, Phoenix says new business acquired during the year should deliver incremental long-term cash generation of £1.2bn. 

It has a healthy balance sheet too, with a Solvency II Shareholder Capital Coverage Ratio of 180%, at the top of its target range of 140-180%. This gives it “significant capacity to invest into growth”, Briggs said.

It may need that capital strength with markets on course for another bumpy year as banking stocks blow up.

Personally, I like buying shares after they’ve sold off. Phoenix trades at a bargain-priced seven times earnings, although I wouldn’t buy expecting it to suddenly rocket. The shares could just as easily fall or go nowhere for years. I would treat any growth as a bonus.

However, I buy FTSE 100 income stocks like this one for the long term, a minimum of 10 years, which gives my dividends time to compound and grow. The current yield would double my money in just over eight years.

I’ve been eyeing up Phoenix for several years. Now I think it’s time to buy it.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones 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.

More on Investing Articles

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

Up another 6% in the last week! Is the BP share price ready to go gangbusters?

The BP share price has been on fire lately. Harvey Jones looks at what's driving the FTSE 100 stock's recovery,…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

High-flying IAG shares are up 50% in 3 months but I still think they’re too cheap to ignore!

Timing the market is almost impossible but Harvey Jones managed it when buying IAG shares in April. Can the FTSE…

Read more »

ISA coins
Investing Articles

Want to earn £1k+ in annual passive income from a £20k Stocks and Shares ISA? Consider this!

Our writer sets out some points to consider when trying to target a four-figure income from one year's Stocks and…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

3 risks to the Rolls-Royce share price, after its 979% climb

After a 979% growth in the Rolls-Royce share price, our writer still sees things to like in the business. But…

Read more »

Buffett at the BRK AGM
Investing Articles

Can Warren Buffett principles help when looking for AI stocks to buy?

Billionaire Warren Buffett has made a fortune by applying old investing principles to new industries. Can our writer learn some…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

Up 36% in 3 months! Is my nightmare purchase of Glencore shares about to come good with a vengeance?

When Harvey Jones bought Glencore shares two years ago, he didn't expect to find himself sitting on a 45% loss.…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

£1,000 invested in Lloyds shares 5 years ago is now worth…

Anyone who’s owned Lloyds shares over the last five years is probably laughing right now with impressive returns that crushed…

Read more »

A mature woman help a senior woman out of a car as she takes her to the shops.
Investing Articles

If a 50-year-old puts £500 a month into a SIPP, here’s what they could have by retirement

Investing £500 a month with a SIPP could build a pension pot worth £269,900 or quite a bit more over…

Read more »