3 top-notch dividend stocks to consider for a bigger, better SIPP

Investing with a Self-Invested Personal Pension (SIPP) is a powerful way of building retirement wealth. After all, the elimination of capital gains and dividend taxes paired with tax relief is a huge 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 for the long run. With that in mind, here are three dividend-paying positions that are already in my SIPP.

Let’s build an income stream

Unlike my Stocks and Shares ISA, which is focused on growth, my SIPP consists of a far more boring collection of businesses. That’s because the strategy for my retirement portfolio isn’t to generate groundbreaking returns but to establish a substantial passive income stream through continuous dividend-hiking stocks.

As such, some of my earliest investments when I launched this portfolio in 2022 were Greencoat UK Wind (LSE:UKW), Safestore Holdings, and Londonmetric Property. In terms of yield, these businesses didn’t offer the highest payout at the time. However, a critical trait among each is their ability to continue hiking dividends.

Despite operating in different industries and sectors, the recurring and consistent nature of their cash flow generation paved the way for a steadily rising shareholder payout. Safestore currently sits on a 15-year record of uninterrupted hikes, while Londonmetric’s at nine years and, until recently, Greencoat was on track to reach double digits.

Needless to say, if dividends keep increasing, my retirement income stream will continue to grow even without adding any extra capital.

Dividends aren’t risk-free

Today, my conviction for each of these businesses remains strong. However, even with a highly cash-generative business model, there are still risks to consider. All firms are reliant on investing in expensive assets, from wind turbines to warehouses. Generally, demand for these assets is rising – a trend I expect to continue.

Unfortunately, this also means the companies are reliant on debt financing, which introduces sensitivity to interest rates. And while these have started to fall, there’s still significantly more financial pressure compared to three years ago.

Greencoat’s also suffering from the cyclicality of energy prices. Skyrocketing energy bills hit a lot of households hard a few years ago. However, the steep increase in electricity prices was a major boon for Greencoat, bolstering profit margins, thanks to its mostly fixed costs.

This translated into record profits that made their way into the pockets of shareholders through dividends and buybacks. Today, electricity prices have started to tumble, taking Greencoat’s bottom line with it, ultimately ending the firm’s nine-year dividend hiking streak as its latest results saw payouts hold steady at 10p per share.

What to make of all this?

All three firms have had their fair share of headwinds lately. And subsequently, their stock prices haven’t been stellar performers. Yet, when looking past the short-term challenges, their long-term growth and income potential remain intact, in my opinion.

So with the opportunity to buy more shares at a discount and a higher yield, all three are currently on my SIPP Buy list whenever I have more capital to spare.

The post 3 top-notch dividend stocks to consider for a bigger, better SIPP appeared first on The Motley Fool UK.

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Zaven Boyrazian has positions in Greencoat Uk Wind Plc, LondonMetric Property Plc, and Safestore Plc. The Motley Fool UK has recommended Greencoat Uk Wind Plc, LondonMetric Property Plc, and Safestore Plc. 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.