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Looking for income? I’d buy these 2 FTSE 100 stocks which yield 7% tax free in an ISA

If you are heading into retirement, or already there, generating an income from your investments becomes a priority. FTSE 100 stocks are one of the best ways of doing it, with the index currently yielding around 4.5%, more than you’ll get from any savings account.

The following two pay even more than that, around 7%. Better still, if you buy them inside a Stocks and Shares ISA, you can take that income completely free of tax.

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HSBC Holdings

Banking stocks are once again a happy hunting ground for dividend investors, particularly Asia-focused HSBC Holdings (LSE: HSBA), which currently offers a mighty forward yield of 6.8%, covered 1.4 times by earnings. Management has been fairly progressive, increasing the payout seven times in the last 10 years. So, with luck, you’ll be locking into a rising income as well.

A dividend of this size can make investors cautious, as they fear it may not be sustainable. This isn’t a major concern with HSBC which, in August, reported an 18.1% rise in first-half profit, after tax, to $9.9bn. Reported revenues also rose 7.6%, and reported operating expenses fell 2.3%. Flush with cash, it’s shortly initiating a $1bn share buy-back.

Growth is a different matter. The HSBC share price trades at similar levels to five years ago, despite a 15% rise on the FTSE 100 over that time. The £123bn giant is facing headwinds in its key Asia division, which have been worsened by the US-China trade war. Brexit has also added a layer of uncertainty, and falling interest rates are squeezing net interest margins.

Much of these concerns are priced into a low forward valuation of just 10.6 times earnings, giving investors a nice safety margin. As an income seeker, you can watch the dividends roll in, and let the share price take care of itself over the longer term.

Standard Life Aberdeen

The Standard Life Aberdeen (LSE: SLA) share price has also had a disappointing run, trading 26% lower than five years ago. You can put much of that down to teething problems over the recent merger, which backfired as Lloyds threatened to pull its £109bn Scottish Widows mandate as a result. This could cost the new group hundreds of millions in fees, offsetting many of the cost savings and synergies.

The dispute was settled in July, largely in the group’s favour, as Lloyds was ordered to pay £140m in compensation, while Standard Life Aberdeen will hold on to a third of its mandate until at least April 2022.

In August, management reported that “lower redemptions and better markets” helped boost assets under management by 5% to £577bn in the first half. The group is now spreading its wings globally, expanding in two massive markets – India and China.

The Standard Life Aberdeen share price has actually risen 15% in a month, helped by an improvement in wider stock-market sentiment. Investors had also braced themselves for a dividend cut that never came.

The forecast yield is a whopping 7.6%, but cover does look thin at 0.9, so there’s a chance the dividend could prove vulnerable. Trading at 15.5 times forward earnings, a fair bit higher than HSBC, this isn’t a bargain.

Given these two concerns, HSBC would be my preferred pick.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.