Here’s how I could earn income of £2,000 a year from a £20k Stocks and Shares ISA

I like to invest my £20,000 Stocks and Shares ISA allowance as early as possible each tax year to give my money maximum time to grow. I’ve recently been loading up on cheap FTSE 100 dividend stocks and now I’m hungry to buy some more.

One of the companies I bought was asset manager M&G (LSE: MNG). I found its yield of just over 11% impossible to resist, as it’s the highest on the index. I didn’t have much cash to spare so only paid in a small sum.

That’s a shame, because the M&G share price is up a steady 7.83% since I bought it on 20 March, at the depth of the banking panic. The FTSE 100 is up 5.5% since then.

That’s a massive income

With 12 months to go before this year’s Stocks and Shares ISA allowance expires, I have plenty of time to build my stake.

Today’s yield is 10.31%. If I invested my full £20,000 allowance right now, this would deliver passive income of a staggering £2,062 in year one. If management regularly increases shareholder payouts over time, it would steadily rise.

Naturally, going all in on one stock is risky, at least for newbie investors. Yet I’m not one of those. I’ve got a balanced spread of global investment trusts and exchange traded funds, plus a focused portfolio of FTSE 100 stocks including Lloyds Banking Group, Rio Tinto and Rolls-Royce.

As a result, investing £20,000 in M&G isn’t going completely overboard. Also, I don’t have £20k at my disposal today, so I would have to stagger my purchases over the year, which would further reduce the risk. Should I go for it?

My first concern is that yield. It’s very, very high, which is often a sign of a company in trouble. Despite the recent pick-up, M&G shares have fallen 11.95% over the last year. Yet that doesn’t put me off. In fact, it suggests an opportunity.

Management is supporting shareholders

The big question is whether the dividend is sustainable. Last year, management was throwing cash at shareholders. It handed them £465m of dividends with a £503m share buyback on top. This hardly looks like a company short of readies.

M&G’s dividend per share has climbed steadily since it was hived off from Prudential in 2019, from 11.92p that year to 19.60p in 2022. The income continued throughout the pandemic.

In 2021, M&G generated £1.87bn of capital. However, it posted a loss of £397m last year, as global stock market volatility hit assets under management, customer inflows and fees. Sharecast puts its dividend cover at -3.4 and, equally unusually, isn’t predicting a forward yield. That’s a worry.

On the plus side, M&G has a Solvency II coverage ratio of 199%, and management has prepared markets for capital generation of £2.5bn this year. If it hits that target, the dividend should hold, or even rise. 

I’m thrilled with recent purchase of M&G and expect to drip-feed more money into the stock this year. But investing my full £20k Stocks and Shares ISA? That’s a step too far for me.

Also, there are other FTSE 100 dividend stocks I’d like to buy this year. I’d happily invest £5,000 in M&G though.