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A SIPP is an ideal vehicle for the type of long-term investment I prefer.
By looking decades into the future and thinking about where certain business sectors and firms may go, I think it is possible to help determine what type of stocks to buy today that can help set the investor up for a great SIPP down the road.
Turns £30k into over £406k!
I don’t buy stocks just because of their yield. After all, no profit is guaranteed.
But I think zooming in on the stock yields I mention below might help clarify why I am a long-term investor.
If an investor puts £10,000 into it Legal & General today and compounding that investment at 8.9% per annum, after 30 years the investment would be over £129k. Entering the same amount IM&G and compounded at 10%, after 30 years holding will cost over £174k. Because British American cigars (LSE: BATS), compounded at 8.1% for 30 years, the investment would be worth over £103k.
So, £30k invested now could be worth more than £406k in three decades.
The potential for compounding high-yield stocks
How likely is that to happen?
I didn’t pick those numbers out of thin air. They are the current dividend yield of those high-yielding stocks.
The example shows no movement in the share price and a stable dividend per share. If the dividend increases, the result can be even better. But benefits can also be terminated or canceled.
All three stocks have a policy of not cutting their dividend per share. In fact, each has grown annually in recent years. However, the high yield could be a warning sign that the City expects cuts could be on the cards at some point.
Assessing potential risks and rewards
To illustrate this point, consider British American Tobacco.
I FTSE 100 the firm is a rare British Dividend Aristocrat, having grown its payout per share every year since the last century. Despite the decline in the price of cigarettes, cigarettes are still big – and very profitable – business.
British American’s portfolio of premium products gives you pricing power in that market. It could also help it as it expands its non-tobacco business into product lines like vapes.
But British American has a lot of debt and its core market is in a systematic, long-term decline. That would be a real risk to the dividend. However, despite the risks, I think British American has a lot of potential and I see it as a share that 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 potential customers, deep experience, and large client bases.
But what if the markets crash? I can imagine many investors rushing to cash out, hurting the profits of asset management and investment firms. That could lead any company to cut (or ax) its shares.
However, in the long run, I like the case of investing in these firms and have no plans to sell my shares.
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