What is the point of putting money into a Self-Invested Personal Pension (SIPP)?
Different people each have their own goal. Broadly speaking, though, most would agree that they are hoping to make some money.
There is much less agreement on exactly how to go about that. Different investors have their own specific goals, investment strategies, and risk appetite. They also have their own blindspots and knowledge gaps.
Still, if someone wanted to build a SIPP with 10 different shares in it and try to combine both dividend income potential with growth opportunities, here is how they might go about it.
Taking diversification seriously
One simple way to reduce risk is by spreading a SIPP across different investments. Not only does that sound like a good idea in theory to me, I think it deserves to be taken seriously in practice too.
Spreading money across 10 different shares does not offer much diversification if most of the money goes into one or two of the shares. It can make sense to spread the SIPP evenly over different shares.
Over time, though, rising share prices can mean one share comes to dominate an initially balanced portfolio, so an investor ought to keep an eye on this.
Many investors have particular business sectors they like. But diversification is not just about spreading a SIPP over a few different shares. To be effective, it helps if those shares are not all concentrated in one area of business.
Going for growth and income
Some investors like the idea of stuffing their SIPP with income shares, aiming to compound the dividends within the SIPP wrapper.
But the long-term timeframe enabled by a pension can also mean that growth stocks can have an opportunity to prove themselves over years or even decades, as the business (hopefully) grows.
I think an investor could have some income-focussed shares and also some growth stocks inside a SIPP.
No dividend is ever guaranteed to last. Having said that, when investing in a group of long-established, proven blue-chip businesses, I typically expect it is unlikely (though possible) that all the dividends totally dry up.
A lot of growth companies, by contrast, end up failing. Some of them do spectacularly well. So when allocating the SIPP, I think an investor needs to think how to match the sorts of growth companies in which they invest with their risk tolerance.
Going for growth and income
Some shares can actually offer both growth and income prospects.
I own some shares in JD Sports (LSE: JD).
The share price has performed disappointingly in recent years. On top of that, even after dividend increases and a weakened share price, the current yield is a little over 1% — not that exciting sounding!
But JD Sport’s expensive expansion drive of recent years has run its course for now, potentially freeing up more cash to fund dividends. That larger store estate, combined with a big digital presence, could also see the company grow its revenues strongly.
Still, the share price in pennies suggests not all investors are convinced. Weak consumer sentiment is a risk to sales of costly clobber.
I continue to hold the share in my SIPP, partly because I like the long-term growth potential but also because I reckon that could translate into a higher dividend down the line.
