David Holding suggests some income shares for SIPP investors.
Last week, I had a look at the types of shares you may want to select for your SIPP (Self Invested Personal Pension) on the presumption that you're near to or already at retirement age -- and that your SIPP is a significant portion of your income. What this infers, of course, is that you're very interested in preserving and growing your capital whilst simultaneously receiving a decent income via low risk, high income investments.
There are different ways of doing this and many different types of investments you can select for a SIPP, but for the purposes of this article, we'll have a look at share selection for SIPP investors prepared to accept equity investment risk whilst hopefully providing an above-inflation income for retirement.
Given this defensive desire, I made the case last week for choosing companies in industries where earnings should stand up reasonably well whatever the economy throws at us such as water, power, housing, telecoms, oil, supermarkets, food, drugs and even banks under normal circumstances.
Then, within sectors identified, we should look to find companies of a decent size (£100m or more) with a trustworthy track record displaying value principles of relatively low price-to-earnings ratios (P/E), high yields, low price to book values, little debt and reasonable prospects for growth.
Yield to the yield
The problem with these requirements is that there simply aren't enough companies matching them and you have to cede points here and there. Of the different value components, sustainable yield is absolutely vital. The percentage that dividends contribute to overall share investment returns when compounded varies from report to report, but the long-term post-inflation returns from shares are usually said to be in the range of 5.5% to 8% a year.
Of these amounts, around 4% to 5% is said to come from dividends and their re-investment. Suffice to say, compounded dividends play a massive role in building the value of your investments, and if you're already at the stage of drawing down an income from your SIPP, you'll definitely appreciate the importance of yield.
It also helps, in the main, to drip feed money in over time -- as long as the yields continue to make sense. This irons out the peaks and troughs and helps take some of the emotion out of your judgement.
So without further ado, let's try and find a few candidates.
Your starter for ten
Royal Dutch Shell (LSE: RDSB) ticks a lot of the boxes for me, as does the other UK oil giant BP (LSE: BP). Both companies are on juicy prospective yields (each around 6.6%), with prospective P/Es under 11 and aren't going away any time soon.
Construction group Kier (LSE: KIE) is trading well, has a very strong balance sheet including plenty cash, and looks like it is weathering the storm well. A prospective P/E of 11.4 and yield of over 5% make it a good SIPP candidate.
Lloyds (LSE: LLOY) is a lot more contentious given its recent history but, reading between the lines, it looks like Britain's biggest lender could be making very healthy profits in the years to come. Ironically, the formerly conservatively managed bank ticks few of the "technical" SIPP boxes, but would still be a choice for me on potential future yield.
Utilities National Grid (LSE: NG) and United Utilities (LSE: UU) both make the frame for me on anticipated yields of 7% or more. Granted, gearing is high as you might expect from a utility, but the P/Es of 10.1 and 8.2, respectively, aren't exactly demanding.
Specialty chemicals group Elementis (LSE: ELM) has rallied very sharply in recent weeks. I thought them a good recovery candidate at 29p in mid July. Today, the shares stand at 50.75p, but should still yield over 5%.
Old favourie BT (LSE: BT-A) meanwhile, has also rallied along with almost everything else since the Spring, but is still on a prospective P/E of 9, a prospective yield of 5.8%, and a historic yield of twice that -- though gearing is high.
The low P/E and attractive forward yield also make Drax (LSE: DRX) look interesting -- albeit something of a one-trick pony. The same criticism can also be levelled at solar power company PV Crystalox Solar (LSE: PVCS). But the contrarian nature of an investment at today's price coupled with the prospective P/E of 8.4 this year, falling to 6.8 in 2010, much lower historic P/E, yield of over 7% and very strong balance sheet are enough to swing it for me.
These ten candidates look worthy of further consideration -- as part of a wider balanced portfolio.
More share ideas from David Holding:
Don't forget you can also open a SIPP with The Motley Fool Share Dealing service.
David owns shares in BP, Lloyds, PV Crystalox Solar, National Grid and United Utilities.