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A SIPP is the perfect vehicle for the type of long-term investment I prefer.
By looking decades into the future and thinking about where business sectors and specific companies may go, I think it is possible to help decide what type of shares bought today could help an investor prepare for a larger SIPP in the future.
Turning £30,000 into over £406,000!
I don't buy stocks just for their returns. After all, no dividend is ever guaranteed.
But I do think that zooming in on the returns of the stocks I mention below can help illustrate because I'm a big fan of the long-term investment approach.
If an investor invests £10,000 in Legal and general today and increased that investment at 8.9% per year, after 30 years the investment would be worth more than £129,000. Put the same amount in M&G and with a 10% capitalization, after 30 years the share would be worth more than £174,000. For British American Tobacco (LSE: BATS), compounding at 8.1% over 30 years, the investment would be worth more than £103,000.
Therefore, £30,000 invested now could be worth more than £406,000 in three decades.
The Power of High-Yield Stock Compounding
What are the chances of that happening?
I didn't pull those numbers out of thin air. They are the current dividend yields on those high-yield stocks.
The example assumes that there is no movement in the stock price and that there is a constant dividend per share. If the dividend increases, the result could be even better. But dividends can also be cut or canceled.
These three stocks have a policy of not cutting their dividend per share. In fact, each has increased it annually in recent years. However, the high returns may be a warning sign that the City hopes a cut may be on the cards at some point.
Evaluate potential risks and rewards
To illustrate this point, consider British American Tobacco.
He FTSE 100 The company is a rare British dividend aristocrat, having increased its payout per share annually since the last century. Despite the decline in cigarette volume, tobacco is still a huge (and hugely profitable) business.
British American's portfolio of premium brands gives it pricing power in that market. It could also help you as you expand your non-cigarette business into product lines like vaporizers.
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, while there are risks, I think British American also has a lot of strengths and I think it's a stock investors should consider for their SIPP.
Building a high-performing portfolio
After all, risk is part of investing.
I own Legal & General and M&G on my SIPP. Both have strengths, such as a large market of potential customers, extensive experience, and a sizable customer base.
But what happens if the markets collapse? I imagine many investors struggling to withdraw funds, hurting the profits of asset and investment management companies. That could lead either company to cut (or even eliminate) its dividend.
However, long term, I like the investment cases for these companies and have no plans to sell my shares.
