A Self-invested Personal Pension (SIPP) suits me very well. As a believer in long-term investing, I like the timeframe of investing for decades to come.
Here are a couple of shares I happily own in my SIPP – one I consider as high-reward and one is high-risk (but also high-reward!)
Of course, everything is relative. If a share was higher risk than I was comfortable with then I would not own it.
High reward share
First, the high-reward share: Legal & General (LSE: LGEN). Over the past five years, it has been a weak performer when it comes to share price performance. Over that timeframe, the share has moved up by just 4%.
But the price tells only one part of the story when it comes to owning this share in a SIPP (which I do). Its current dividend yield is 9%.
It has not cut the payout per share since the financial crisis. Indeed, this year, it has indicated it plans to keep growing the per-share payout annually in the medium term, albeit at a lower level than investors have come to expect in recent years.
Underpinning that high yield are a number of strengths. I like the size and resilience of the markets in which Legal & General specialises, such as retirement-linked financial services.
It has a number of specific strengths, from a very solid brand in the UK market to a large customer base. I think those competitive advantages could help keep the strongly profitable company in the black.
Although I see Legal & General as a high-reward holding for my SIPP, that does not mean it is without risk. No investment is. As that previous dividend cut suggests, a financial crisis can be challenging for Legal & General. When the next one happens – as it inevitably will sooner or later – there is a risk of clients pulling out funds, hurting profits.
As a long-term investor though, I like the outlook for Legal & General and plan to keep holding it in my SIPP.
High-risk share
What, then, about the high-risk share in my SIPP? With its 8.5% yield, it is another FTSE 100 high yielder. Yet given that it is lower than Legal & General’s offer, why would I own it if I think the risks are notable?
The share in question is British American Tobacco (LSE: BATS) and I do think the risks are sizeable, from a large net debt to long-term structural decline in the number of cigarette-smoking customers in key markets.
Then again, its dividend record strikes me as more consistent than that of Legal & General. British American Tobacco is what is known as a Dividend Aristocrat, having raised its dividend annually for decades.
The cigarette demand challenge is real. But it has existed for a long time and cigarette revenues remain substantial. British American owns premium brands that give it pricing power, both in cigarettes and non-cigarette product lines it is aiming to grow.
Its business is massively cash generative. That helps explain its generous dividend. While there are sizeable risks here, I am comfortable with them balanced against the potential rewards.
This post was originally published on Motley Fool
