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Investing in a self-investment personal pension (SIPP) is a powerful way to build retirement wealth. Ultimately, the elimination of dividend taxes paired with capital gains and tax easing is a major advantage that regular trading accounts don’t offer.
However, as with all investment portfolios, success depends on finding the right stocks to buy and hold in the long term. With that in mind, here are three dividend payment positions already in my SIPP.
Create a flow of income
Unlike my stocks and stocks that focus on growth, my SIPP consists of a much more boring collection of businesses. That’s because my retirement portfolio strategy is to establish a substantial passive income stream through ongoing dividend hiking stocks, rather than generating groundbreaking returns.
So some of my earliest investments when I launched this portfolio in 2022 were Greencoat UK Wind (LSE: UK), Safe Store Holdingsand London Metric Properties. In terms of yields, these businesses didn’t offer the best payments at the time. However, an important feature between each is its ability to continue hiking dividends.
Despite operating in a variety of industries and sectors, the recurring nature of cash flow generations paved the way for steadily rising shareholder payments. The SafeStore is currently on the record of 15 years of uninterrupted hikes, while the London Metric was nine years, and until recently Greencoat was on track to reach double digits.
Needless to say, as dividends continue to increase, the retirement flow will continue to grow without adding additional capital.
Dividends are not risk-free
Today, my belief in each of these businesses remains strong. However, even in a highly cash-generating business model, there are still risks to consider. All companies rely on investing in expensive assets, from wind turbines to warehouses. In general, the demand for these assets is increasing. This is a continuing trend.
Unfortunately, this means that companies rely on financing their debts, which gives them sensitivity to interest rates. And although these have begun to fall, there is still a significant amount of financial pressure compared to three years ago.
Greencoat also suffers from periodicity in energy prices. A few years ago, a surge in energy bill was hit hard by many households. However, the sharp rise in electricity prices was a major boon for Green Encourt, and its profit margins have been strengthened thanks to mostly fixed costs.
This was converted into record profits that went into shareholder pockets through dividends and buybacks. Today, Greencoat’s revenues have begun to fall, and the latest results have finally concluded their nine-year dividend hiking streak, as dividends remain stable at 10p per share.
What to do with all of this?
Recently, all three companies have had a significant proportion of headwinds. And then their stock price was not a great performer. But in my opinion, looking past the short-term challenges, the long-term growth and income potential remains.
So, all three are currently on SIPP’s purchase list, as there is an opportunity to buy more shares with discounts and higher yields.