3 reasons to focus on passive income investments in 2022

If there is any time to earn passive income, that is now, believes Manika Premsingh. One reason is that FTSE 100 yields are rising. But there are others too.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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There are some years that are more suited for specific types of investment than others. For instance, last year was a great one for many recovery stocks. The year before was an exceptional one for cyclical stocks like real estate and mining. And this year, I think could be a good one for me to make passive income investments. Here are three reasons why. 

#1. FTSE 100 dividends are rising

2021 was already a good year for dividends, as would have been expected. 2020 was a disaster when it came to passive income. Dividends were reduced, cancelled and suspended as Covid-19 created heightened uncertainty for the global economy. But as things started improving, dividends made a return. The FTSE 100 average dividend yield now stands at 3.4%, which is not too bad. 

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And it appears that 2022 could be even better. According to AJ Bell, the FTSE 100 dividend yield for the year should rise to 4.1%. And this is despite the fact that stocks with the biggest current dividend yield could see some softening in dividends. I am talking about miners like Evraz, BHP and Rio Tinto. The stocks paid out huge dividends as commodities rallied well into 2021. However, with their somewhat dimmer prospects for 2022, their dividends might not be quite the same as they were last year. And BHP is set to exit the London Stock Exchange altogether. 

If the overall Footsie’s dividend yield is expected to rise despite this, it suggests to me that other stocks’ yields could rise higher. I would expect oil biggies and retailers to be among them, going by their recoveries so far. This expands my choices for high-yield dividend investments. 

#2. Passive income to the rescue as inflation rises

With inflation on the rise, the real value of my earned income is declining. According to the Office of Budget Responsibility, inflation will average 4% in 2022. This essentially means that my consumption spending is likely to rise. It would be nice to be able to supplement it with dividend income. If this more than makes up for the rise in inflation, there need not be any change in my standard of living because of rising inflation. 

#3. FTSE 100 stocks are still priced low

Despite all the recovery that has been seen in stock markets, some FTSE 100 stocks are still priced below their pre-pandemic levels. Two prominent examples for me are those of the oil giants BP and Royal Dutch Shell. As I was saying earlier, both stocks’ dividend yields are more likely to rise during 2022. Oil prices are expected to stay strong this year as travel inches back towards pre-pandemic levels and economic recovery continues. Because of this, I think there is significant upside to oil stocks’ prices. And this might be a good time for me to buy more of them to get the best dividend yields from them in 2022.

Wrapping up

While I am convinced that dividend yields are set to rise, I am aware of the fact that the pandemic is not entirely over yet and the economy might still be on shaky ground. However, much like the stock market crash taught me that bad times are actually good times to invest, I think an uncertain stock market could also be a great time to buy dividend stocks that would earn me a solid passive income over the years. 

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Manika Premsingh owns BP, Evraz, Rio Tinto, and Royal Dutch Shell B. 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.

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