A SIPP is the perfect vehicle for the sort of long-term investing I prefer.

By looking decades into the future and thinking about where business sectors and specific firms may go, I think it is possible to help decide what sort of shares bought today might help set an investor up for a bigger SIPP down the road.

Turning £30k into over £406k!

I do not buy shares just because of their yields. After all, no dividend is ever guaranteed.

But I do think zooming in on yields of the shares I mention below can help illustrate why I am such a fan of the long-term approach to investing.

If an investor put £10,000 into Legal & General today and compounded that investment at 8.9% annually, after 30 years the investment would be worth over £129k. Putting the same amount into M&G and compounding at 10%, after 30 years the holding would be worth over £174k. For British American Tobacco (LSE: BATS), compounding at 8.1% for 30 years, the investment would be worth over £103k.

So, £30k invested now could potentially be worth over £406k in three decades.

The power of compounding high-yield shares

How likely is that to happen?

I did not pick those numbers out of thin air. They are the current dividend yields of those high-yield shares.

The example presumes no share price movement and a steady dividend per share. If the dividend moves up, the result could be even better. But dividends can also be cut or cancelled.

All three of these shares have a policy of not cutting their dividend per share. Actually, each has grown it annually in recent years. However, high yields can be a warning sign that the City expects a cut could be on the cards at some point.

Assessing potential risks as well as rewards

To illustrate the point, consider British American Tobacco.

The FTSE 100 firm is a rare British Dividend Aristocrat, having grown its payout per share annually since the last century. Despite falling cigarette volumes, tobacco remains huge – and hugely profitable – business.

British American’s portfolio of premium brands gives it pricing power in that market. It could also help it as it expands its non-cigarette business in product lines such as vapes.

But British American has a lot of debt and its core market is in systemic, long-term decline. That could be a real risk to the dividend. Still, although there are risks, I think British American has a lot of strengths too and see it is a share investors should consider for their SIPP.

Building a high-yield portfolio

Risk is part of investing, after all.

I own Legal & General and M&G in my SIPP. Both have strengths, such as a large market of possible customers, deep experience, and sizeable client bases.

But what if the markets crash? I could imagine many investors scrambling to pull out funds, hurting profits at asset and investment management firms. That could lead either company to cut (or even axe) its dividend.

Over the long run, though, I like the investment case for these firms and have no plans to sell my shares.  

Is it possible to start buying shares with a small sum of money, or is it necessary to wait until a thousand pounds I’d saved up?

The answer to that question is simple. It is, indeed, possible to start investing in the stock market with a limited amount.

Below, I explain how a new investor, from a standing start, could build a share portfolio by putting aside £50 per week.

The power of regular investing

Fifty pounds and is an arbitrary number here. I could use more, or less. The same principles would still apply. But everyone’s financial circumstances are different.

Over a single year, £50 a week adds up to more than £1,000 to invest. From little acorns great oaks really can grow.

One move before someone starts buying shares it to set up a share-dealing account or Stocks and Shares ISA.

That would let them start making regular contributions and be ready to invest when they found shares to buy.

How to start investing

I say “shares” because diversifying across different companies is a simple but powerful risk management method for investors on all levels.

As a new investor, it helps to get to grips with key stock market concepts like valuation and risk assessment.

A lot of people start with sky-high ambitions. I understand that but it pays to be realistic. So I think a new investor should set a strategy for assessing the sort of shares they plan to buy, sticking to their own circle of competence and focusing not just on possible rewards but also on how to manage risk.

Finding shares to buy

One approach would be to buy shares in investment trusts. They are pooled funds that invest in a diversified range of shares. Examples include City of London Investment Trust and Scottish Mortgage Investment Trust.

Another approach (both could actually be used) would be to put together a portfolio of individual shares.

One mistake some people make when they start buying shares is thinking that a great business equals a great investment.

That can be the case but not necessarily. A lot depends on valuation when purchasing.

As an example, consider Apple (NASDAQ: AAPL). This looks like a great business to me. It has a large addressable market of target customers and can exploit that thanks to competitive advantages ranging from proprietary technology to a large installed user base.

It has also been a great investment in the past five years, almost tripling in value.

But (and this is another common mistake people make when they start buying shares) past performance should not necessarily be used to set expectations for what may happen in future.

Apple trades on a price-to-earnings ratio of 35. That looks expensive to me, especially considering risks Apple faces such as competition from cheaper Chinese brands.

When investing, like Warren Buffett, I aim to buy shares in great companies at attractive prices. I think that approach can makes sense for an experienced investor, but also for those who plan to start buying shares for the first time.

Getting into the stock market, some people hope to aim for a million by turning a small stake in some incredible company into a seven-figure investment.

That may happen from time to time, but it is very rare. I think it makes more sense to take a rational approach to investing based on things that seem to have a decent chance of happening, rather than on events that could pay off massively but in reality only have a small chance of coming to fruition.

So, as I aim for a million over the long term in my portfolio, my approach is to focus on a few, well-known shares. Here I explain why.

Quality over quantity

The idea of finding a small, little-known firm with a share price that soars has obvious appeal.

But, investing in lots of companies hoping that one of them may be the next Nvidia means the amount available to invest in any one share is limited. Meanwhile, the risk profile of the overall portfolio could be higher than if sticking to proven businesses.

While some tiny startups go on to massive success, most do not.

Why a few star performers can turbocharge a portfolio

Warren Buffett has put much of his success in investing down to a long-term timeframe and a great decision every five years or so.

The maths make sense. Imagine an investor invests in £100,000 in 50 shares and they compound at 5% annually. It would take 48 years for the portfolio to be worth a million pounds.

But what is that investor invested in just the best five to 10 of those shares and was able to achieve compound growth of 15% annually?

In that case, the plan to aim for a million would be realised after just 17 years.

Getting serious about making money

Before I go on to discuss how I hunt for shares that perform brilliantly, it is worth making a couple of points about this example.

It requires a long-term timeframe. It also foresees investing £100k, which is a lot of money. The same approach could work with less money, but would need a longer timescale.

But this is not some get rich quick scheme. It is a serious approach to aim for a million in the stock market.

Looking for shares to buy

While a 15% compound annual gain may not sound very difficult to achieve, it is actually pretty tough, especially over the long run. So I look for shares I think have a sustainable competitive advantage in an industry I expect to benefit from long-term demand.

To Illustrate, consider Ashtead Group (LSE: AHT). It has more than doubled in the past five years and also has a dividend yield close to 2%.

Construction equipment rental is an area that is likely to see high demand over the long run, as was the case five years ago. Back then, Ashtead had an extensive depot network and large customer base that gave it a competitive advantage. It still does.

Past performance is not necessarily a guide to future performance. Ashtead faces risks such as a possible downturn in construction hurting rental demand.

So, for now, I have no plans to invest. But understanding its strong performance in recent years can hopefully help me as I aim for a million.

There are plenty of dividend shares around at the moment. I reckon 83 stocks on the FTSE 350 are presently offering yields in excess of 5%.

Impressively, if this level of return could be achieved by an investor for 25 consecutive years, an initial investment of £20,000 would grow to £67,727. And after a quarter of a century, the portfolio would generate income of £3,225 a year, or £269 a month. Not bad for doing very little.

I chose £20,000 as a lump sum in my example because this is the maximum amount that can be invested each year in a Stocks and Shares ISA.

The principal advantage of this type of investment vehicle is that all gains and income are earned tax-free.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

However, it must be pointed out that dividends are never guaranteed. And any investment can go down in value, without warning.

Spreading the risk

That’s why diversification is important. Putting this hypothetical £20,000 into just one stock wouldn’t be a good idea.

Of course, an investor could be lucky and choose one that soars in value. But there’s also the possibility that they’d pick one that underperforms the wider market.

There are no hard and fast rules when it comes to choosing how many stocks to buy. But it’s a mathematical certainty that the more shares an investor has in their portfolio, the closer the return’s likely to be to the market average.

My approach

Personally, I think, with £20,000 available, that investing in five stocks makes sense.

And I’d target the many UK shares that have paid generous dividends for several years.

One of these is Legal & General (LSE:LGEN). Over the past 25 years, it has only ever cut its dividend during the 2007-2008 financial crisis. For 2024, it’s promised to pay 21.36p a share, which is a 5% increase on 2023. This means the stock’s presently yielding a rather impressive 9.2%.

And the company has pledged to increase its payout by 2% a year, from 2025 to 2027.

The stock remains on my watchlist for when I next have some spare cash. That’s because I think the company is well positioned to maintain its strong payout, and continue to grow it over time.

The group currently has a pipeline of £14bn of third-party pension schemes that it’s looking to acquire. In 2023, it achieved a return on equity of 9.7%. Let’s say it manages to secure ‘only’ a third of these retirement plans and repeats its 2023 return — annual earnings would increase by at least £450m. For context, its adjusted operating profit in 2023 was £1.67bn.

Legal & General is also financially robust, holding more than twice the level of reserves that it’s legally obliged to have.

Other considerations

But there are risks. The company has £197bn of equities, and nearly £10bn of investment properties, on its balance sheet. Any stock market or property market wobbles are therefore likely to have a huge impact.

The company also faces stiff competition. This could explain why its assets under management fell by 2.9%, during the 12 months to 30 June 2024.

However, despite these potential challenges, I remain a fan of the stock. And I reckon it shouldn’t be too difficult to find another four UK shares — with above-average yields — that would complement Legal & General in a diversified and well-balanced portfolio.

Latest figures (March 2023) from HMRC reveal that £725.9bn’s been invested in Stocks and Shares ISAs. Although this sounds like a lot, it’s only a quarter of the market value of Nivdia. But it’s definitely my preferred approach to investing in the UK stock market. That’s because any capital gains generated using an ISA — and all income received – are free of tax.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The most that can be invested each year is £20,000. But what sort of return could this achieve?

A dream scenario

According to AJ Bell, when the final dividends for the year are confirmed, it looks as though the FTSE 100 will have yielded 3.6%, in 2024. If this level of return could be achieved for 25 years, and £20,000 was put into an ISA each year, an investor would have £817,862 at their disposal after a quarter of a century.

In year 26, this would generate income of £29,443. Alternatively, drawing down 5% of this pot each year would release £40,893.

This assumes all dividends are reinvested, a process known as compounding. It’s been described as the ‘eighth wonder of the world’, as well as mankind’s greatest invention. It certainly always gets good press.

Something more realistic

However, I don’t think many people are in a position to invest the full amount each year. Even so, a one-off lump-sum of £20,000 would still grow to £48,420 over the same period, with a 3.6% annual return.

Both these scenarios assume no capital growth (or losses). And it goes without saying that dividends cannot be guaranteed. However, it does show the potential benefits of taking a long-term view. Billionaire investor Warren Buffett’s been at it for 83 years, and he’s reckoned to be worth over $140bn!

Building blocks

History tells us that many industries fall in and out of favour. But looking ahead 25 years, I think housebuilding stocks will still be around. After all, everyone needs somewhere to live.

Taylor Wimpey‘s (LSE:TW.) a FTSE 100 builder that has an excellent reputation for paying generous dividends. Although not yet confirmed, it looks as though it’ll return 9.6p to shareholders in respect of its 2024 financial year. If this proves correct, it implies a forward yield of 8.5% (17 January).

However, for the company’s dividend to be sustainable there needs to be a recovery in the housing market. And its latest trading update, suggests this could be happening. At 31 December, its order book was £1.995bn, an increase of £223m from a year earlier. It also reported a lower cancellation rate and an increase in enquiries. In addition, it has plenty of land (79,000 plots) on which to build.

But the industry faces its challenges. Recent market turbulence has put doubt on whether the Bank of England will cut interest rates as fast as previously predicted. And the latest UK economic data’s been disappointing, which could affect consumer confidence.

However, the company’s strong balance sheet (it has very little debt) puts it in a good position to take advantage of a recovery.

I won’t invest as I already have a position in peer Persimmon and I don’t want two shares in my ISA from the same sector, especially with very similar operating models. But I believe it’s worth investors considering.

Passive income describes generating money from doing very little. And what’s not to like about that? But the word ‘passive’ can be misleading. There’s a bit of up-front work needed to identify the best stocks. In addition, it’s important to monitor them on an ongoing basis.

However, generally speaking, it’s possible to generate a healthy level of income with the minimum of effort.

Personally, I like to invest in FTSE 100 companies. In theory, these are the biggest and best that Britain has to offer. Their global reach, experienced management teams, and robust balance sheets means they are less likely to deliver earnings surprises. As a result, most of them regularly return cash to shareholders via steady and reliable dividends.

Of course, the level of income received is never guaranteed. But according to AJ Bell, the UK’s largest listed companies are expected to pay dividends of £83.6bn, in 2025. This implies a forward yield of 3.9%.

Huge potential

If an investor started with £20,000, a 3.9% return would give them £780 in dividends in year one. Reinvest this and they could receive £810 the following year. Repeat this annually and — after 25 years — they’d have £52,050. After a quarter of a century, this would generate income of £1,954 a year, or £163 a month. But remember, this ignores any capital growth (or losses).

However, there are plenty of shares that offer a better return.

One for consideration

One such example is National Grid (LSE:NG.), the energy infrastructure owner and operator. In respect of its 31 March 2024 financial year (FY24), it paid 54.13p a share. Impressively, since at least 2000, it’s increased its payout every year. And it plans to grow it annually by CPIH (the consumer prices index, excluding housing costs) from FY25-FY29.

The index is currently at 3.5%, which could mean a dividend of 56p next year. With a share price of 963p (17 January), this would imply a yield of 5.8%.

National Grid’s healthy dividend’s possible due to the fact that its principal markets are all regulated. This means it doesn’t face any competition and, as long as it meets certain investment and performance targets, it’ll know what level of return it can generate. And therefore how much cash is available to give to shareholders.

Potential issues

However, energy infrastructure assets are expensive. It plans to spend £60bn over the next five years and its legacy capital expenditure programme has resulted in large borrowings on its balance sheet. At 30 September, the group’s debt was £45.2bn.

Its level of gearing might explain why the company turned its back on debt providers and surprised shareholders in May, by launching a £7bn rights issue.

But despite these concerns, I remain a fan of the company. Its defensive qualities are particularly attractive to me during the current global economic uncertainty. That’s why it’s on my shopping list for when I’m next looking for a FTSE 100 income share.

Returning to my example, applying a 5.8% return to a £20,000 investment would result in £81,879 after 25 years. At this point, the annual dividend would be £4,749, or £396 a month. 

Although this is a hypothetical example — it’s never a good idea to invest exclusively in one stock — it does show what’s possible from a portfolio of high-yielding shares.

Like drinking water, writing a to-do list, and staying off social media, some of the best ideas are pretty straightforward. And that might also be the case when it comes to earning passive income. 

Despite the FTSE 100 hitting record levels, shares in Unilever (LSE:ULVR) are almost 10% off their 52-week high. So should investors stop overthinking things and start buying the stock?

Unilever’s business

Investors who don’t read the label on everything they buy are probably familiar with more Unilever products than they can name. But the business is actually in the process of shifting its strategy. It’s moving from trying to infiltrate people’s cupboards by owning every branded product under the sun to focusing on its strongest names. These include the likes of Domestos, Dove, and Persil. 

Divested lines include Alberto Balsam (which I like), Brylcreem (which I don’t), and Lever 2000 (which I’ve never heard of). And it’s also selling its ice cream unit, which includes Ben & Jerry’s and Magnum.

Despite the shift, the underlying business model’s still familiar. The firm’s brands give it negotiating power with retailers and its distribution network helps it position its products all across the globe.

Dividends

Unless something truly desperate happens, I don’t think demand for the kind of products Unilever sells is going to drop dramatically. And the company’s in a strong competitive position. 

Investors might therefore see the recent drop in the share price as a potential buying opportunity. The dividend yield‘s around 3.2%, which doesn’t look like much but that could change if interest rates fall. This is roughly in line with the stock’s 10-year average. But Unilever’s portfolio adjustments have resulted in good sales growth, so I think there’s a decent chance of the dividend increasing from here.

I think investors looking for passive income might do well to consider shares in a company that has recognisable strengths. Especially when it might have a bright future.

Risks

Unilever’s a long way from the cutting edge of technological innovation. But there are still some key risks that investors considering the stock should be aware of. One of the firm’s biggest challenges is its products typically have zero switching costs. People don’t have to buy Dove soap because it’s the only one that’s compatible with their bathroom sink. 

As a result, there’s always a risk of customers trading down to cheaper store brands – or across to Procter & Gamble products. That means an ongoing battle for market share, where nothing’s certain.

Investors should be aware of this when considering the stock. But it’s also worth noting that a huge marketing budget gives Unilever an advantage in keeping its products at the front of consumer minds.

A stock to consider

At first sight, Unilever’s business is pretty uncomplicated. But there’s a lot that goes on behind the scenes to help the FTSE 100 company hold on to its dominant market position. 

That might be a good combination for investors. And with the stock down almost 10% from its 52-week highs, I think it’s well worth considering at today’s prices.

Unlike the Hokey Cokey, buying shares when they trade below their intrinsic value is what investing is all about. But if it was as simple as this, investing would be a lot easier than it actually is.

A company’s book value – the difference between what it owns and what it owes – can give some idea of what a stock’s worth. And a few FTSE 100 shares look cheap on this basis.

Barclays

Barclays (LSE:BARC) is one example. At a price-to-book (P/B) multiple of 0.69, the company could in theory sell off everything, pay down its debts, and give investors £1 back for every 69p they invested.

That’s nice in theory, but not only is the bank not doing this, it’s doing the opposite and attempting to expand its US credit card business. So investors thinking about buying the stock need a better thesis. 

It’s not hard to find one. Barclays is trading at a lower P/B multiple than Lloyds Banking Group (0.87) or NatWest (1.00), indicating the market doesn’t think it can use its assets as efficiently as its rivals.

That might be a mistake. Unlike the other UK banks, Barclays has a big investment banking division and this should benefit if the Bank of England gets back to cutting interest rates – as I think they will.

One of the risks with the stock is the possibility of shifting banking regulations. No less than billionaire investor Warren Buffett cited this as a key reason for selling US banks and it’s something the firm has no control over.

Despite this, the relative discount to other FTSE 100 banks makes Barclays shares interesting and worth further research. And this is certainly a better thesis than hoping a low P/B multiple means a quick return might be on the cards. 

Vodafone

Like Barclays, Vodafone (LSE:VOD) trades at a discount to its book value. The current share price implies a P/B multiple of 0.34 – the lowest in the FTSE 100. Investors should note though, that the telecoms company’s balance sheet isn’t so straightforward. On the asset side, it has a significant amount of goodwill, which is an intangible asset. 

Goodwill appears on a company’s balance sheet when it makes acquisitions. But if the value of those investments changes over time, the associated goodwill tends to evaporate into thin air.

I think investors would therefore be wise to discount this from their thinking when it comes to Vodafone’s assets. Even so, the stock’s still well below the company’s book value.

Importantly, the firm (unlike Barclays) has been looking to take advantage of this. It has sold off its Spanish and Italian units and returned some of the proceeds to shareholders via buybacks. I think this has clearly been a better use of capital than its huge investment in 3G licenses, but CEO Margherita Della Valle has ruled out further divestitures. With that being the case, I don’t have a reason for wanting to buy the stock. 

Valuation

Buying shares for less than they’re worth is great and can give value investors a nice warm feeling inside. But it can be a long time before the returns show up. Unless something happens to close the gap between price and value, stocks can trade below the book value of the underlying business for a long time.

That’s something for investors to remember.

The Stocks and Shares ISA allowance is a brilliant way to generate passive income because it’s 100% tax-free. Investors get to keep every penny of the dividends they earn, and there’s no need to include ISAs on tax returns.

Many people play safe by generating income from a Cash ISA, which is essentially a tax-free savings account. With interest rates relatively high, they can currently get up to 4.5% a year on a one-year fixed-rate Cash ISA or 4.2% fixed for five years. And their capital’s secure.

I’m using my Stocks and Shares ISA for tax-free wealth

Personally, I don’t take that route. While I keep some cash on easy access for emergencies, my long-term savings are all invested in the stock market. For me, it’s a no-brainer.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Moneyfacts figures show the average annual total return from a Stocks and Shares ISA over the past decade is 9.6% a year. This includes both share price growth and dividend income. By comparison, the average Cash ISA returned just 1.2% annually.

While today’s higher interest rates may narrow the gap, savings accounts are unlikely to match the long-term total return of shares. 

Of course, stock markets can be volatile in the short term, which is why I never invest with less than a five-year time horizon. The real rewards come over decades. That’s how I’m building wealth for retirement.

The blue-chip FTSE 100 index is filled with fantastic high-yielding shares like insurer Aviva (LSE: AV), which currently offers a trailing dividend yield of 6.77%. Over the past year, its shares have climbed more than 14%. Combined, that would have delivered a total return of over 21%.

Neither the share price nor dividend is guaranteed. Aviva’s share price could fall in the next 12 months for all anyone knows. However, the company seems well-positioned. Its board has been streamlining operations and focusing on core markets in the UK, Ireland, and Canada. This should boost efficiency.

The shares come with a dazzling yield

Additionally, demand for retirement and investment products is growing as the population ages. Aviva operates in the competitive financial services sector, and factors like economic downturns or market instability could hit profitability. Yet over the long run, I expect its dividend and share price to rise steadily.

It’s wise to spread risk across 10-15 dividend-paying stocks, in the hope that if one or two underperform, others will more than compensate.

Let’s say an investor puts their £20,000 ISA allowance into shares growing by 9.6% annually. After 20 years, they’d have £125,000. Staying invested for 30 years would increase this to an impressive £312,857.

If those shares yielded an average second income of 6%, they’d generate £18,771 a year. And that’s without touching the capital. It works out as £1,564 a month. Not bad from an initial £20k. And with luck, the income would grow over time. I do think it’s worth further research.

To me, that makes a compelling case for investing in a Stocks and Shares ISA over cash.