As a rule, when investing in FTSE 100 stocks to earn a passive income, I like to consider dividend yields. These represent the likely return on my investment over the next year or so. This yield changes all the time, of course, because the broader macro environment might shift for better or for worse. And individual companies’ conditions could alter too, leading to fluctuations in both dividends and share prices. Still, it is a starting point that I believe can help me earn a targeted level of passive income in the next three to five years.
Why dividend growth is important
But, if I am looking at long-term investments, it is a good idea to consider dividend growth as well. This is because it turns out that some of the best FTSE 100 dividend investments over the past decade have been stocks that grew dividends fast, not necessarily those with the highest yields. In this context, I thought of considering three stocks that could show double-digit dividend growth in 2022 when planning my investments.
Interestingly, two of them are financial services stocks. These are London Stock Exchange Group is expected to show the highest increase of 15.7% as per recent research by AJ Bell. This is followed by the asset manager Intermediate Capital Group, which is expected to see a 14.3% rise. The only non-finance FTSE 100 stock here is the industrial equipment rentals’ provider Ashtead, which is likely to show a 12.5% increase.
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FTSE 100 companies’ earnings rise
However, I am assuming that this will happen only if the companies continue to see earnings’ growth. Because if they do not and dividends are still increased, the dividend cover would fall. And I am not sure if that would be considered a prudent decision by investors. So would their earnings increase?
I am optimistic that it might be the case. All three are cyclical stocks, which means they are likely to show better performance during periods of economic upturn. With recovery expected to continue this year, they could continue to make gains.
What I’m wary of
If I had to be wary, though, London Stock Exchange would top the risky stocks list. Its big acquisition of Refinitiv seems to have spooked investors and its price-to-earnings (P/E) at a huge 80 times, takes away from its attractiveness right now too.
Ashtead fares much better when it comes to its P/E, which is 30 times. But it is still higher than the 18 times for the FTSE 100 index as a whole. Moreover, much of its revenue comes from the US. While the country is recovering, the Build Back Better bill remains under peril, which could impact the company’s prospects. Still, it has managed impressive growth over time, so it could continue to do so in the future as well.
What I’d do now
I think the best of the three stocks is Intermediate Capital Group. It has a P/E of 15 times, which is lower than that for other stocks. It is of course possible that its investments might not do as well next year or even the year after, but so far it appears that things are going in its favour. If I had to buy one, it would be my pick of the lot.
