Pensions, for many of us, seem a long way off – until they don’t. So a lot of investors pay too little attention to their Self-Invested Personal Pension (SIPP) for a long time before later scrambling to try and bulk it up as retirement draws closer.
This can raise the question of how to strike the right balance between growth and income shares for a SIPP.
Why growth can make sense in a SIPP
Each investor is different, of course, so there is no one correct answer. Some investors may even feel there is no need to balance, for example plumping for putting their whole SIPP into income shares in the hope of steady passive income streams.
This is understandable. Retirement costs money – and pensions may be the only source of income at that point.
But I think the long-term nature of investing for retirement in a SIPP can provide the sort of timeline in which some growth shares are able to shine, as their businesses prove themselves and then develop.
Understand your objectives and risk tolerance
Part of this process will also depend on what someone is looking for from their SIPP, in terms of investment objectives.
Some people will hope dividends from the SIPP can form a significant part of their income in retirement. Others will be looking for the prospect of capital gain and may place a lower value on dividends.
Getting clear about your objectives and your risk tolerance (how much risk is willing to be taken in search of the targeted level of reward) is always an important part of any investing. This is true when it comes to deciding how to invest the money in a SIPP too.
Thinking about income – and the source of income
One of the things I think is important when it comes to any income shares is trying to dig into the source of income. Where is it coming from? How likely is it to last?
Some investment trusts or companies may offer a high yield today, but in a way that seems ultimately unlikely to be sustainable over the long term. Maybe the business is in decline, or the trust’s spare cash is being eaten up.
When a company grows dividends, I like the underlying business to have growth prospects to support that. Take Spirax Group (LSE: SPX) as an example. It is one of the few FTSE 100 companies to have grown its dividend per share annually for decades.
The firm spent £87m on dividends in the first half of last year. That was covered by adjusted cash from operations of £97m, although once income taxes, interest and acquisition costs are considered, it reported negative free cash flow for the period.
If that continues, it is a risk to the dividend.
But combining acquisitions and its existing business, I think Spirax has the potential to grow operating cash flows over time.
It has a proven business model and industrial customer base often needing its specialist expertise to keep the machines running. That gives it pricing power. It also develops bespoke solutions for customers’ problems, helping encourage repeat business.
For now, the share price is too high for me to add Spirax to my SIPP just yet. But I am keeping an eye on it.
