How I’d turn an empty ISA into a second income of £12k a year

Harvey Jones is looking to generate a high and rising second income from a balanced portfolio of FTSE 100 shares. Here’s one he really likes.

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I’m looking to use this year’s Stocks and Shares ISA allowance to build a second income that will last me as long as I live.

There are plenty of great high-yield stocks to choose from. My favourites include Legal & General Group, M&G and Phoenix Group Holdings (LSE: PHNX). Today, all three stocks offer incredible trailing yields, as my table (below) shows.

Dividend heroes

Combined, they yield a mighty 9.33%. If I split my full ISA allowance equally between the three, I’d pocket a second income of £1,867 a year. I might enjoy some capital growth as well, if their share prices rise.

Yet I won’t buy all three at the same time. They’re all in the financial services sector which means they’re subject to similar forces. I believe the sector will recover when interest rates finally start falling and the global economy revives. Yet I’d diversify into other sectors, just in case that rosy scenario doesn’t pan out.

Sadly, recent share price performance has been poor. Happily, those outsized yields look relatively secure. No guarantees though. There never are.

YieldP/E ratio1-year stock growth
Legal & General8.76%31.76x3.89%
Phoenix Group9.77%16.48x1.58%

I’m particularly keen to use my ISA to top up my stake in Phoenix. Its share price is showing signs of life, up 8.84% in the last week. This is partly down to rising hopes of a rate cut, although not entirely.

Phoenix is looking to offload its SunLife over-50s business after deciding it was no longer a core operation, and has “a number of initial expressions of interest”

I’ve no idea whether it will succeed. Nor does Phoenix. Either way, it doesn’t really matter to me. I’ll be looking to hold the stock for a decade or two, to let my reinvested dividends compound and grow.

FTSE 100 recovery play

I think the long-term investment case is strong, as the population ages and invests more in retirement products. That yield is dizzyingly high but looks secure with Phoenix generating more than £2bn of cash in 2023. It looks financially solid, with a Solvency II surplus of £3.9bn.

The board hiked the dividend by just 2.5% in 2023. The income is high, but will rise only slowly from here. It has also chosen to set aside £500m to reduce net debt between now and 2026.

Phoenix isn’t as cheap as it was, trading at 16.48 times earnings. But I’ll still add it to my ISA this summer and match it with three or four more FTSE 100 dividend-paying shares, possibly lower yielders with higher growth prospects.

Now, let’s say they deliver an average annual return of 8%, broadly in line with the long-term FTSE All-Share return. After 30 years – which is my investment timescale – I’d turn £20k into £201,253.  Which shows the power of compound interest.

I doubt my portfolio will yield 9.33% then. But if it yielded, say, 6%, that would still give me a second income of £12,075 a year. No guarantees, of course, but it’s something to aim out. That’s the power of FTSE 100 income shares.

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 positions in Legal & General Group Plc, M&g Plc, and Phoenix Group Plc. The Motley Fool UK has recommended M&g Plc. 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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