Thinking of investing in a SIPP for high yield shares? 3 things to consider
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Some investors take a more conservative approach when it comes to investing in their Self-Invested Personal Pension (SIPP). They focus on high-yielding stocks and try to build multiple sources of income, compounding profits along the way.
This approach can have both advantages and disadvantages. Here are three things to think about when deciding whether a SIPP might make sense for you.
Growth and income can both help you build wealth
Seeing the benefits accumulate can be exciting, in part because they are not subject to tax while they are inside the SIPP wrapper.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Conversely, putting money into a growth share and holding it for nearly decades without receiving a single dividend may seem less exciting. But growth stocks can help build wealth, if they end up selling at a high price.
Dividend shares and growth shares generally offer different routes for trying to increase the value of a SIPP. In fact, they both probably did.
High productivity can be a red flag, but it isn’t always the case
As a general rule, I think it makes sense to invest by finding good companies and checking whether their share price is attractive. In fact, a liquid dividend can sometimes discourage investors who intend to do so.
They start by finding a high-yield share. They check whether the payment is included in the income. Then, they try to convince themselves that risks (such as dividend cancellations) are manageable.
Sometimes, however, a high yield can be a red flag that the City has doubts about whether the company will be able to maintain its dividends.
Such benefits are sometimes cut or canceled. Others stay the same or grow – and investors can get smaller income streams.
So I think it’s important as an investor to be honest about the risks of a particular share, not just the potential rewards.
Staying separate is always important
Generally, high-yielding stocks cluster together in certain sectors of the stock market.
Right now, for example, there are three of them FTSE 100The top five stocks are financial services firms. The other two are real estate companies.
I FTSE 250 shows a different bias but the same pattern. All five of its most productive stocks are linked to renewable energy.
It is always important to manage investment risk through diversification. With high-yield stocks clustered in certain sectors, that can take a concerted effort.
By nature, a SIPP is a long-term investment vehicle. Its lifetime may involve periods when cyclical stocks are at different points in the economic cycle. That could mean depressed share prices, dividend cuts, or both.
I haven’t owned any renewable stocks in my portfolio recently, so I took the opportunity to add Greencoat UK Wind (LSE: UKW).
The company has shares in many wind power projects. That has helped it grow its profits every year in recent years. paid a dividend of 10.7 %.
The stock is also selling at a huge discount to the stock price, suggesting it could be a premium.
Still, as the past year’s share price performance and high yields suggest, some investors are nervous about the prospects for energy funds, including this one. Changing attitudes towards energy policy combined with current energy price volatility could hurt profits.
I think that fear is more than factored into the current share price, however, so I happily bought the share because of the passive income.
