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

2023 concept with a lightbulb replacing the zero

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.

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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.