One of the things I like about investing in a SIPP is that the timeframe is an ideal match for my long-term approach to investing.
Imagine if I could grow a £100K SIPP by 9% annually, excluding any new contributions I made. After 10 years, it ought to be worth £237,000.
After 20 years, I would have comfortably passed a valuation of half a million pounds. Thirty years in, my initial £100,000 investment would be showing a valuation of £1.3m.
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Is it possible?
I think so, by sticking to some fairly simple investment principles.
Spreading the load
If I found an amazing share I thought could produce spectacular returns, ought I to load my SIPP up with it to the exclusion of other options?
I do not think so. The problem I see is: the problems I cannot see!
In other words, a company can face challenges that are not obvious. So I would spread my SIPP over a range of different shares. With £100K, that should be easily doable.
Quality of dividends
Few shares have a dividend yield as high as 9%, although some do. Those that do, though, may have a high yield partly because investors expect a cut.
Vodafone currently yields over 9%, for example, but announced this month that from next year it plans to slash its dividend by half.
So, with a 9% compound annual return as a target, ought I to focus on dividend or growth shares?
Yields of 9% are rare but some growth shares can return much more than that. A look at the NVIDIA share price chart neatly illustrates the point.
The answer, I think, is that both growth and income shares might have a place in my SIPP. But rather than focusing purely on dividend yield, I would look at the quality of the dividend.
Is it well supported? Does the business have some competitive advantage that could help maintain or grow it over the long run?
At the end of the day, I look for the same characteristics in both growth and income shares. I want to invest in businesses I believe have outstanding business prospects that are significantly undervalued in their current share price.
Business outlook and share valuation
As an example, consider a share I own in my SIPP: JD Sports (LSE: JD).
It does pay a dividend. That dividend has seen a big increase. But with a yield far below 9%, I would not expect to hit a 9% annual compound annual return target from the dividend alone.
However, I think JD also offers exciting growth prospects. It plans to open hundreds of new shops annually.
The company has a proven business model that it could expand both in its existing markets – like the US – and new ones. It has also been experimenting with ideas on how to grow its reach, for example by operating gyms.
After a profit warning in January, the shares have lost momentum. Risks include a soft economy leading to lower demand for pricy trainers, hurting profits.
But if shares like JD ultimately deliver for me, I think a long-term 9% annual growth target for my SIPP is achievable.
