Investing in a Self-Invested Personal Pension (SIPP) is one of the best ways to build a chunky nest egg for retirement. After all, this special brokerage account doesn’t only grant access to the stock market. It also offers powerful tax advantages that can propel a pension pot far higher than a Stocks and Shares ISA.
In fact, investors can receive up to 45% tax relief depending on their income tax brackets, with most individuals eligible for a minimum of 20%. In other words, for every £1,000 deposited into a SIPP, investors could receive an extra £250-£820 in tax relief.
But what are the best stocks to buy and hold with all this extra capital? One popular choice is Dividend Aristocrats. The London Stock Exchange is home to a wide range of these income-hiking enterprises. And there’s more than enough industry variety to build a diversified passive income portfolio.
Investing in Aristocrats
As a quick reminder, a Dividend Aristocrat is an income-generating blue-chip company that’s hiked shareholder payouts for at least 20 years. And looking across the FTSE 350, there are currently 30 stocks that sit in this coveted group. And this number of members is even larger if we include the businesses that temporarily cut dividends during the pandemic.
Not all of these businesses offer the highest dividend yields. In fact, most sit close to or below the FTSE 100’s average of 4%. However, as management teams continue to hike shareholder payouts, the yield on an initial investment steadily rises. And after 10 or 20 years, a 3% yield can transform into 15% without becoming unsustainable.
With that in mind, dividend aristocrats sound like the perfect investment idea for a SIPP. After all, these large-cap companies tend to be far less volatile compared to growth stocks. And the passive income from dividends can be leveraged as a retirement income stream.
Sadly, blindly investing in these companies doesn’t guarantee success.
What’s the catch?
Most Aristocrats are mature industry leaders. That’s terrific for investors seeking stable dividends and share prices. However, maturity doesn’t always equal safety. And a perfect example of this would be British American Tobacco (LSE:BATS).
The tobacco titan has increased its dividend payment to shareholders for more than 25 years in a row. After all, with cigarettes remaining popular worldwide, the firm has had little trouble generating cash flow. And yet the stock price doesn’t seem to reflect this. In fact, since 2017, the group’s market-cap has been chopped in half.
Anti-smoking regulation has been steadily increasing year-on-year to the stage where proposed long-term smoking bans have started circulating in parliament. Needless to say, that’s bad news for British American and its shareholders. And it’s why management has been aggressively investing in healthier cigarette alternatives like vaping devices to adapt to this increasingly present regulatory threat.
The problem is that while the firm’s making progress, it’s not the only tobacco business attempting to change course. With so much competition trying to penetrate this new market, it’s unclear whether the firm can maintain its cash flows in the long run, let alone increase them.
This isn’t the only Dividend Aristocrat potentially in trouble. Therefore, while these can be lucrative sources of passive income, investors need to examine each one carefully before adding them to their SIPP.
