2022 is expected to be a good year for FTSE 100 dividends. According to recent research by AJ Bell, the dividend yield of all index constituents put together will be 4.1%. This is an appreciable rise from the current 3.4% level. In other words, as an investor I can look forward to an increase in dividends accruing to my portfolio.
Why the Stocks and Shares ISA
However, I do have to keep taxes in mind, since dividends over £2,000 are taxable for the year ending 5 April 2022. I think there is a possibility that this allowance could be lowered in the spring budget, due in March this year. The government has taken on big debts to deal with the pandemic. And considering that last year was a good one for dividends, lowering the dividend allowance might just allow it to collect more taxes to fund its debt. I do have a way out of these taxes, though. If I invest through a Stocks and Shares ISA wrapper, which has an annual investment limit of £20,000, I do not have to pay these taxes.
FTSE 100 oil stocks are promising
The question now is, which stocks would I buy in the wrapper? There are plenty of stocks that I like for the upcoming financial year, but the FTSE 100 stocks that I think hold most dividend potential are oil companies. Big oil firms like BP and Royal Dutch Shell have come a long way since the pandemic happened. Oil prices have been on the rise in the past year and oil demand is likely to stay strong as the economy continues to gain speed. Both stocks already have above average dividend yields. BP’s is 4.3%, that Shell’s is 3.5%.Â
And I think these are quite likely to rise more as the pandemic recedes further. Keeping this in mind, I think they would make good investments for my Stocks and Shares ISA. Though, I am aware of the fact that the pandemic might just throw another curveball our way. And that would mean a potential decline in dividends rather than gains. But this is a risk that I am happy to take right now, because in my assessment, the most probable outcome would be the end of the pandemic.Â
Dividend yields could rise for banks
This risk, and this assessment, is also true for FTSE 100 bank stocks. This is the other sector that I think has a lot of promise with respect to dividends in 2022. Stocks like Lloyds Bank and HSBC had strong dividend yields pre-pandemic. However, they are yet to return to these levels even though they have resumed paying dividends. Both Lloyds and HSBC’s yields are actually below the average FTSE 100 yield. However, I think there is a strong chance of these improving as the demand for loans increases as the economy recovers. Also, with interest rates on the rise, banks have an opportunity to better their margins. Both stocks are on my investing wish-list for 2022.Â