2 FTSE 100 dividend stocks I’d buy in a Stocks and Shares ISA for passive income

Whether it’s for retirement or simply to earn money while you sleep, building passive income streams is a key goal for many investors. My favourite way to generate passive income is buying dividend stocks in a Stocks and Shares ISA to maximise my potential dividend income beyond the £2,000 tax-free annual allowance. Here’s why I see Lloyds (LSE: LLOY) and BP (LSE: BP) as solid investments to earn passive income from the stock market in 2022.

Lloyds: the FTSE 100’s dark horse for passive income

Investing in dividend stocks carries a risk of capital erosion. The Lloyds share price has experienced mixed fortunes in this regard, gaining over 30% in the past year but declining by more than 25% over five years.

Current macroeconomic conditions should be favourable for the Lloyds share price. The Bank of England recently lifted the base rate to 0.5% to combat inflation and the bond market is pricing in further interest rate rises. Lloyds should perform well in this environment as it can charge higher rates for its loans, increasing profit margins.

Lloyds may not seem the obvious choice for passive income investors. Following a regulatory decision, Lloyds suspended dividend payments in 2020 alongside other FTSE 100 banking stocks. Lloyds has restarted dividend payments but, at a 2.42% yield, the stock trails the FTSE 100’s current yield of 3.48%. However, this could soon change with Deutsche Bank analysts forecasting a future dividend yield of 8-9% for Lloyds.

Lloyds is the UK’s largest mortgage lender. It has a limited international presence. Accordingly, the stock is more exposed to the health of the domestic economy and housing market than its competitors. As the cost of living rises, the potential spectre of mortgage defaults could hurt the Lloyds share price.

Despite these risks, I see Lloyds as a good passive income stock for 2022. I keenly await the bank’s full-year financial results, due on 24 February, which I hope will confirm my decision to buy Lloyds shares now.

The outlook for BP’s share price and dividends

Yesterday, Brent crude prices reached a seven-year high, exceeding $99 per barrel. Many analysts predict further oil price increases with Russia’s military presence in Ukraine acting as a catalyst. BP’s share price closely follows oil and this makes the stock one of my top passive income picks for 2022.

Despite a significant drawdown in 2020, the BP share price has regained positive momentum, climbing 43% over the past 12 months. BP’s current 4.1% dividend yield is just above the FTSE 100 average, but the company has forecasted a healthy 4% annual increase to its dividend through 2025. With a stated intention to deliver a further $1.5bn in share buybacks and an impressive distribution history, BP is hard for me to ignore as an investor seeking passive income.

The primary challenge to BP’s business remains the global transition away from fossil fuels to renewable energy. While BP has ambitions to become a net-zero company by 2050, it is difficult to see how future government policies to tackle climate change do not amount to an existential threat to the energy giant.

Nonetheless, with oil demand surging, promising dividend prospects, and impressive recent financial results, I consider BP to be a solid passive income stock to hold.

Charlie Carman owns shares in Lloyds. The Motley Fool UK has recommended Lloyds Banking Group. 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.