It’s often said that you should only invest what you can afford to lose. However if you’re investing within a Self-Invested Personal Pension (SIPP), and therefore responsible for your own retirement funds, I’d argue that you can’t really afford to lose anything at all.
With your quality of life during retirement at stake, I believe it’s important to invest your SIPP in high-quality dividend-paying companies that will increase your wealth slowly and consistently over time, and minimize the chances of experiencing big losses.
With that in mind, here are two stocks that I think could make excellent SIPP holdings.
Insulated from Brexit
Prudential (LSE: PRU) is the largest insurer in the FTSE 100 with a market capitalisation of £40bn, and in my opinion, is a great example of a high-quality stock that has the potential to provide capital and dividend growth for its shareholders.
The insurance giant provides protection and savings opportunities to 24 million people around the world and has significant operations in the UK, the US and Asia. Prudential’s Asian and US life businesses make up around 30% and 40% of earnings respectively, and this geographic diversification appeals to me, because not only is the insurer insulated from domestic Brexit issues, but the company is well placed to take advantage of the “compelling structural growth fundamentals” in Asia.
Earnings have more than doubled in the last five years, growing from 61p per share in FY2010 to 124p in FY2015, and while analysts predict that earnings this year may be a little soft, FY2017 is forecast to be a stronger year.
Prudential has grown its dividend every year since 2004 and while the insurer’s current yield of 2.5% isn’t the highest dividend in the FTSE 100, it is one of the faster growing dividends in the index with growth of 14% per year over the last five years. Furthermore, Prudential has a dividend coverage ratio of 2.1, indicating that the dividend is unlikely to be cut.
Is now the time to buy? On a forward looking PE ratio of 13.5 times earnings Prudential doesn’t look overly expensive, however with the stock rising 20% this month, it might pay to wait for a pullback before buying.
Consistent track record
Another high quality company that I believe has fantastic SIPP potential is Reckitt Benckiser Group (LSE: RB). The £47bn market cap consumer goods company owns an impressive stable of trustworthy brands including Nurofen, Durex and Dettol and, as a result, is able to generate strong, consistent sales around the world no matter what shape the economy is in.
Reckitt Benckiser has performed wonderfully for shareholders over the last five years, generating total annualised returns of over 26% per year. However, the downside of this outperformance is that the stock looks a little expensive for investors looking to initiate a position right now.
While the share price has corrected around 12% since mid-July, Reckitt still trades on a forward looking P/E ratio of 23 times FY2016 estimated earnings, which is a tad high in my opinion. A company with such a consistent track record is always going to trade at a premium to the market. But the fact that Reckitt’s current yield is just 2.18% compared to its 10-year average yield of 2.71%, suggests to me that the stock doesn’t offer the best value at the moment and it’s one to keep on the watchlist for now.
