With £20,000 to invest, I would ideally put my investible funds into a Stocks and Shares ISA. It has a unique advantage of allowing me tax relief on my investments. This is great at any time. But particularly now, when inflation is high and already eating into my real income.
Why Stocks and Shares ISA works for 2022
Also, I think the advantages of a Stocks and Shares ISA can be fully felt now, when the stock markets are doing well. The FTSE 100 index has been pretty much consistently rising month-on-month for the past year. And in November so far, the index is up by almost 18% from the same time last year! As the recovery continues, I reckon there is much more steam left in it. This could translate into higher dividends and bigger capital gains, and would also mean higher taxes to be paid.
Having explored the benefits of the Stocks and Shares ISA for now, the question now is what the best stocks are for me to invest in through it. For 2022, I am interested in three categories of stocks, which could overlap.
Growth stocks for best capital gains
The first is growth stocks. These could allow me to maximise the potential offered by fast rising stock markets. There are a number of FTSE 100 stocks that fit into the category. These include non-essential retailers, construction, and e-commerce related stocks. But I think there are more to consider as well. Traditional cyclical stocks like commodities and financials could also see big returns next year in my view.
Dividend stocks for solid passive income
The next is dividend stocks. I would not want to miss out on the huge dividend yields offered by FTSE 100 companies these days. I would exercise some care here when deciding the floor, though. The dividends offered should be at least 4%, because that is the expected average inflation rate for next year. Right now, the average FTSE 100 dividend yield is at around 3.5%. This means I could lose money in real terms when buying this average stock for dividends.
The good news is that there are plenty of stocks that offer dividend yields higher than this level. And these range across sectors from real estate to utilities, from miners to insurers. And many of them also double up as growth stocks for now.
Defensives as precaution
The last kind of stocks I would consider buying are defensives. While the stock markets are buoyant right now, there is no guarantee that they will stay like this. There are still plenty of risks around. The pandemic has still not gone away, inflation is a rising concern for companies and the Chinese Evergrande example a few months ago showed how precarious the recovery might still be. So defensives like healthcare and utilities will also be among my picks for 2022.
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Manika Premsingh 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.