1 high-risk and 1 high-reward share I’ve chosen for my SIPP

Balancing potential risk and reward is important for any investor. Our writer hopes two high-yield shares in his SIPP help him strike the right balance.

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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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has positions in British American Tobacco P.l.c. and Legal & General Group Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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