The first month of 2022 has shown to me that it might just be a good year for the stock markets. The FTSE 100 index has gained some ground. Global growth forecasts are robust. And policy makers are moving in fast to tame runaway inflation. However, that does not automatically imply that it is a good year for passive income as well. In fact, I am of the view that my dividend income needs to be carefully nurtured this year. Otherwise it runs the risk of declining from last year.
Why my passive income could fall
There are three reasons I believe that my passive income needs close monitoring.
#1. Sector specific developments: Last year’s big dividends stars were FTSE 100 multi-commodity miners like Evraz and Rio Tinto. And I have bought both stocks, with dividends being a big reason. However, the outlook for their dividends is not as good for 2022. With commodity price moderation underway, according to recent AJ Bell research, both companies are due to slash dividends this year. It also says that FTSE 100 dividend growth will decline. Based on these observations, I reckon others like Anglo American and the FTSE 250 stock Ferrexpo, two other miners in my portfolio, could go the same way.
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#2. Rising inflation: Even if dividends were to grow, could they rise as fast as inflation? The fact is that rising inflation is eating into my real passive income anyway. Even if I earn a robust dividend income, just the fact that everything around me is more expensive means that each unit earned has relatively less value. It also means that I have a far smaller selection of FTSE 100 stocks to choose from, that will earn me positive real dividend income. Consider that the going inflation rate is 5%+ on an annual basis and it is forecast to average 4% for 2022. At the very least, I should earn 4% on my dividend yields, if not more. How many stocks could bring me that?
#2. Cost pressures: Further, rising inflation is increasing cost pressures for companies. As a result, a number of them might just report slimmer margins if they are unable to pass on higher costs to end consumers. And that of course can tell on dividends. This means my passive income could dwindle not just because of miners’ but stocks across sectors.
What I’ll do
So what will I do? I think investing can give returns in various ways, and passive income is only one of them. In a year that dividend income looks like it is on potentially shaky grounds, I could just focus on capital growth or safe stocks like utilities that have given dependable income over time. Alternately, I could think really long term, like the next decade or so, because many fluctuations in the short to medium-term can actually smooth out over time. And I could well still turn out ahead even if one year is relatively bad for dividend income.
