What is common among the three stocks Evraz, Ferrexpo, and CMC Markets? They are some of the best dividend stocks today. The FTSE 100’s Evraz has been a dividend star for all of last year, with a whopping 16% dividend yield. The FTSE 250 stock Ferrexpo is an even better passive income stock for me today with a yield of 17.2%. Investing platform CMC Markets is not much far behind either, with a 10.5% yield.
Dividend tax to pay
I hold all three stocks in my investment portfolio. I see them all as good companies, whose stock prices could rise over time, but right now nothing beats their dividends. The trouble with dividends, though, is that they attract taxes. My returns from them would look even sweeter if I could pay minimal taxes on them.
Right now, I have a dividend allowance of £2,000, which means that up to this amount I do not have to pay taxes on my dividends at all. But, if I invested say, £20,000 across all three of these stocks, my total dividend pay out from them at today’s yields would be around £2,900. This means I would still need to pay tax on the £900 earned over my dividend allowance. Moreover, the higher my tax bracket, the more I would have to pay. It could even be over 38% of my dividend income.
The Stocks and Shares ISA alternative
There is a solution to this challenge, however. And that is the Stocks and Shares ISA. In it, I have an allowance of £20,000 every year for investing, and all investments made in it are non-taxable. This means, the extra £900 would attract zero tax if I use this option.
This for me, is a particularly good alternative during a year when dividends are rising. Right now, the average FTSE 100 dividend yield is 3.4%. However, economic recovery is underway, markets are strong, and hopefully we will be able to put the pandemic behind us in 2022 as well. This could be a positive for business, which has already recovered a fair bit in 2021. Research by AJ Bell even expects FTSE 100 yields to rise to 4.1% on average.
Even better passive income expected
It is possible ,of course, that the same stocks will not continue to yield such high passive incomes for me in 2022. In the case of miners like Evraz and Ferrexpo, for instance, some cooling-off in investor interest has been visible for months as metal price forecasts have been reduced for this year. But on the whole, dividends are likely to be much better anyway. The basic point I am making here is that I expect my dividend income to continue being strong this year. And knowing this, I would much rather save on taxes than not. The Stocks and Shares ISA provides me a good alternative to hold on to my earning for the next tax year.
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Manika Premsingh owns CMC Markets, Evraz and Ferrexpo. 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.
