A SIPP is the perfect vehicle for the sort of long-term investing I prefer.
By looking decades into the future and thinking about where business sectors and specific firms may go, I think it is possible to help decide what sort of shares bought today might help set an investor up for a bigger SIPP down the road.
Turning £30k into over £406k!
I do not buy shares just because of their yields. After all, no dividend is ever guaranteed.
Should you invest £1,000 in British American Tobacco right now?
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But I do think zooming in on yields of the shares I mention below can help illustrate why I am such a fan of the long-term approach to investing.
If an investor put £10,000 into Legal & General today and compounded that investment at 8.9% annually, after 30 years the investment would be worth over £129k. Putting the same amount into M&G and compounding at 10%, after 30 years the holding would be worth over £174k. For British American Tobacco (LSE: BATS), compounding at 8.1% for 30 years, the investment would be worth over £103k.
So, £30k invested now could potentially be worth over £406k in three decades.
The power of compounding high-yield shares
How likely is that to happen?
I did not pick those numbers out of thin air. They are the current dividend yields of those high-yield shares.
The example presumes no share price movement and a steady dividend per share. If the dividend moves up, the result could be even better. But dividends can also be cut or cancelled.
All three of these shares have a policy of not cutting their dividend per share. Actually, each has grown it annually in recent years. However, high yields can be a warning sign that the City expects a cut could be on the cards at some point.
Assessing potential risks as well as rewards
To illustrate the point, consider British American Tobacco.
The FTSE 100 firm is a rare British Dividend Aristocrat, having grown its payout per share annually since the last century. Despite falling cigarette volumes, tobacco remains huge – and hugely profitable – business.
British American’s portfolio of premium brands gives it pricing power in that market. It could also help it as it expands its non-cigarette business in product lines such as vapes.
But British American has a lot of debt and its core market is in systemic, long-term decline. That could be a real risk to the dividend. Still, although there are risks, I think British American has a lot of strengths too and see it is a share investors should consider for their SIPP.
Building a high-yield portfolio
Risk is part of investing, after all.
I own Legal & General and M&G in my SIPP. Both have strengths, such as a large market of possible customers, deep experience, and sizeable client bases.
But what if the markets crash? I could imagine many investors scrambling to pull out funds, hurting profits at asset and investment management firms. That could lead either company to cut (or even axe) its dividend.
Over the long run, though, I like the investment case for these firms and have no plans to sell my shares.
