What are the ideal shares for a SIPP?

Is a SIPP any different to an ISA or a share-dealing account when it comes to finding the right shares to buy?

That can be a useful question to ask, I reckon, as it helps crystallise one’s thoughts on what one is trying to achieve with the SIPP.

Forced to think for the long term

As a believer in long-term investing, I try to buy shares I expect to hold for the long term regardless of what investing platform I am using.

But there is a difference when it comes to investing in a SIPP. Unlike other investment platforms, the money is effectively tied up for decades for many investors (depending on their age), due to a minimum age of 55 before taking anything out of the SIPP (and that is set to rise to 57 several years from now).

Now, that does not mean that the shares inside cannot be sold. They can be sold just as they could in an ISA or dealing account.

But there is a difference. When life throws us some urgent need for cash, many people may consider selling shares in their ISA or dealing account to raise funds. In a SIPP, as I explained above, the funds are not available for withdrawal before a certain age.

In some ways I see that as a positive thing. Without the ability to withdraw money from it, a SIPP can really help me as I aim to be a long-term investor, something that otherwise can be easier in theory than in practice.

Compounding dividends can be lucrative

As an example of what that might mean, imagine someone invests £1k and compounds it at 5% annually.

After 40 years, it ought to be worth over £7k.

That has involved no work on the investor’s part. They simply buy the share in their SIPP, then sit back and let it compound over the coming decades.

Value creation can come in different forms

Then again, investing £1k in Nvidia (NASDAQ: NVDA) just five years ago would already have seen the holding’s value increase to almost £13k from share price increase alone (excluding currency fluctuations).

Now, it is often easier to find a share that currently yields 5% than to spot a share like Nvidia at the right moment in its development.

But the point is that, while dividends can help boost a SIPP’s value, so can capital gains.

Looking to the future

For me, then, the ideal shares for my SIPP are the ones that I hope offer me the biggest total returns (whether through dividends or capital gains), adjusted for the long-term risk.

Could Nvidia be such a share?

Although I focused on its share price gains above, it does actually also pay a dividend. The yield is tiny at the moment, but if business growth enables the dividend to grow over time, it could get bigger.

Meanwhile, increasing demand for chips could help boost Nvidia’s sales and profits. They have surged in recent years, but the best could be yet to come thanks to its proprietary designs and large installed user base.

Its price-to-earnings ratio of 54 is too high for my tastes, though. Risks include a slowdown in AI spending hurting chip sales volumes.

For now, I will not be buying it for my SIPP.