As a risk-averse, long-term investor, I hold a diversified range of shares in my SIPP.
But some shares have a bigger role in my portfolio than others. The one that has the biggest position offers me a very juicy dividend yield – but also carries some risks.
Here is why I have invested in it.
Long-term outlook
The share in question is British American Tobacco (LSE: BATS).
On one hand, the income share has been a solid dividend provider for my SIPP. Not only does it offer a 9.3% dividend yield, but the company has raised its shareholder payout annually for several decades.
That does not mean it will continue to do so in future: after all, dividends are never guaranteed.
But with the huge cash flows thrown off by the tobacco business, I think British American might turn out to be a strong income performer for years or perhaps decades to come.
On the other hand, I also think British American Tobacco has growth prospects.
Risks and rewards
That might seem surprising. After all, cigarette use is falling in many markets and the long-term trajectory for cigarette demand is downhill.
But while volumes may fall, a company like British American has pricing power thanks to its premium brands like Lucky Strike. That could help it sustain profitability even in the face of declining volumes.
British American has also been able to grow its revenues by building its total business size through acquisitions.
A key growth driver could be non-cigarette product lines. While cigarettes are declining, vaping is seeing heavy growth in many markets. Over the long run, I expect that to play to the strengths of established businesses like British American that benefit from well-known brands, strong distribution networks, and a deep understanding of the regulatory environment.
I still think the falling demand for cigarettes is a big threat to British American’s revenues and profits. Indeed, I think that explains why the share is one of the highest yielders in my SIPP: some investors fear the dividend is unsustainable and are pricing the share accordingly. Nonetheless, I see growth as well as income prospects for the company.
Building a diversified portfolio
In my SIPP I hold a number of different shares. Some are very clearly focussed on growth.
But I also own a number of income shares I hope can help boost the overall portfolio value in coming years thanks to their juicy dividends. For a FTSE 100 share, a yield of over 9% looks especially attractive to me – if it is sustainable.
While there are clear risks here, I think that there are also big opportunities. The cigarette business may be in decline but remains huge: British American alone sold over 600bn cigarettes last year.
Meanwhile, non-cigarette businesses offer sizeable growth opportunities in coming years. British American is not priced like a growth stock. It has lost 32% of its value in the past five years and trades on a price-to-earnings ratio of just six.
Balancing the risks and rewards, I like the outlook for British American – and my SIPP reflects that!
