I’m using my Stocks and Shares ISA allowance to generate a tax-free passive income to top up my state pension when I retire.
To achieve this, I’m building a portfolio of high-yielding FTSE 100 shares, which offer some of the most generous dividends in the world. The two highest yielders in my portfolio, wealth manager M&G and insurer Phoenix Group Holdings (LSE: PHNX), currently give me an ultra-high second income with yields of 10.14% and 9.01% a year respectively.
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.
Better still, when the Bank of England finally cuts interest rates – which could happen as early as May – their share prices should recover as economic sentiment and stock markets rebound. So I might just bag some capital growth as well.
Look at those dividends
Double-digit yields can prove vulnerable. Some 18 months ago, I bought housebuilder Persimmon and miner Rio Tinto, which were yielding 20% and 10% respectively. Within weeks, both payouts had been slashed.
Yet after reading their company reports, I think both M&G and Phoenix have a good chance of maintaining their super-sized shareholder rewards.
Since listing in 2019, M&G has returned more than £2.5bn to shareholders. In half-yearly results published on 20 September last year, the board confirmed that its “policy of delivering stable or growing dividends to our shareholders remains unchanged”. It then hiked its interim ordinary dividend by 5%.
M&G boasts financial strength after generating first-half operating capital of £505m, up from £433m the year before. Its shareholder Solvency II coverage ratio is strong at 199%. Markets reckon the yield will creep up to 9.23% in 2024.
The M&G share price climbed 10.95% in the last year, giving me a 12-month total return of almost 20%. Neither dividends nor capital growth is guaranteed and if shares crash M&G will duly follow. Since I plan to hold for the long-term, I can look past short-term volatility.
Phoenix is my most recent purchase, bought on 30 January at £5.11 a share. With the stock at £5.05 today, I’m down 1.66%, but these are very early days.
Just brilliant yields
As with M&G, I plan to hold Phoenix for years and ideally decades, to give my dividends and any capital growth time to compound and grow.
The Phoenix share price has crashed 21.42% over the last 12 months, and looks dirt-cheap at today’s trading at 6.1 time earnings. I’d buy more if I had the cash, even though it has hardly responded to this week’s rally. I may have to be even more patient with this one.
While I wait for the recovery, I’ll reinvest my blockbuster second income. Again, it looks solid, with Phoenix hitting its £1.5bn new business long-term cash target two years early. Given recent poor share price performance, the dividend is the main reason for holding the stock.
Combined, these two uber-yielders yield 9.58%. If I split a full £20k ISA allowance between them, I’d hope to get income of £1,915. That’s almost £2k in year one and if I’m right and their dividends are sustainable, that should steadily rise over the years. Who knows, I might get some share price growth too.
