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

I like to invest the £20,000 Savings and Shares ISA allowance as early as possible each tax year to give the money maximum time to grow. I recently loaded cheap FTSE 100 dividend stocks and now I’m hungry to buy more.

One of the companies I bought was an asset manager M&G (LSE: MNG). I find the yield of just over 11% impossible to refuse, because it is the highest in the index. I don’t have much money to spare so I only pay in small amounts.

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

This is a great income

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

The current yield is 10.31%. If I invest my current £20,000 allowance, this will generate a passive income of £2,062 in year one. If management regularly increases shareholder payouts over time, it will continue to rise.

Of course, all in one stock is risky, at least for new investors. But I am not one of them. I have a spread of global investment trusts and balanced exchange-traded funds, plus a focussed portfolio of FTSE 100 stocks included Lloyds Banking Group, Rio Tinto and Rolls-Royce.

As a result, investing £20,000 in M&G will not go beyond that. Also, I don’t have £20k at my disposal right now, so I have to spend on purchases during the year, which will reduce the risk. Should I?

My first concern is yield. It is 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% in the past year. But that didn’t put me off. In fact, suggest opportunities.

Management supports shareholders

The big question is whether the dividend is sustainable. Last year, management threw cash at shareholders. They paid a dividend of £465m with a £503m share buyback on top. This hardly seems like an underprepared company.

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

By 2021, M&G will generate capital of £1.87bn. However, it lost £397m last year, as global stock market volatility hit assets under management, customer inflows and costs. Sharecast puts the dividend cap at -3.4 and, equally unusually, does not predict future yields. That’s worrying.

In addition, M&G has a Solvency II coverage ratio of 199%, and management is poised to raise £2.5bn of capital this year. If it reaches that target, the dividend should continue, or even go up.

I am happy with the purchase of the new M&G and hope to trickle-feed more money into the savings of the year. But invest the full £20k in a Stocks and Shares ISA? That was a step too far for me.

Also, there are other FTSE 100 dividend stocks that I plan to buy this year. I would love to invest £5,000 in M&G.