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4 income stocks I’d buy with $4,000 today

There are two ways to generate a return as a shareholder. Either with a capital gain through the growth of the share price, or with the income as dividends.

The long term return of the Australian share market has been around 10% a year on average and that’s excluding franking credits. This return is including both dividends and share price growth.

A lot of investors just look for growth stocks that should grow share prices long term at a good rate, such as REA Group Limited (ASX: REA) and Seek Limited (ASX: SEK).

However, a total shareholder return is made up of both dividends and share price growth. If we can identify stocks that look like they will maintain or increase a large dividend payment, this could provide most of the return we are looking for.

Here are four stocks that could maintain or grow their big dividends:

Rural Funds Group (ASX: RFF)

Rural Funds Group is a real estate investment trust that purely invests in farms such as vineyards, cotton, almonds, macadamias and cattle. Farmland should be useful for a very long time into the future.

It leases these farms to high-quality tenants such as Treasury Wine Estates Ltd (ASX: TWE) and Select Harvests Limited (ASX: SHV).

Rural Funds Group has built-in rental increases in its contracts such as CPI inflation. This allows management to confidently predict the distribution (dividend) increases to shareholders each year. Management forecast 8% growth in FY17 and 4% growth in FY18.

Assuming Rural Funds Group pays $0.0241 cents per share each quarter for the rest of this financial year, it’s currently trading on a forward dividend yield of 6.03%.

G8 Education Ltd (ASX: GEM)

G8 Education is Australia’s largest listed childcare provider. It has centres in Australia and Singapore.

As G8 acquired a lot of childcare centres it achieved a lot of growth, but now this growth has slowed down. It still managed to grow its underlying net profit after tax by 1.6% in the half year to 30 June 2016.

It has been paying a fully franked $0.06 cents per share dividend every quarter since January 2015. This equates to a grossed up dividend yield of 10.7%.

G8 is expected to continue paying the same dividend for the next 12 months and then start growing the return in FY18. The dividend alone (if maintained) would give shareholders a return over 10% each year.

Mortgage Choice Limited (ASX:MOC)

Mortgage Choice is one of Australia’s largest loan brokers. It earns its revenue by receiving a commission on the loans delivered by the broker for the life of the loan.

Of course, the more loans Mortgage Choice delivers the bigger commission it receives. Though it can also quite easily lose a mortgage too if a loan holder moves to a better deal. Mortgage Choice would hope the new loan would also be through one of its brokers.

It’s increased or maintained its dividend every year since 2010 and is currently trading with a fully grossed up dividend yield of 10.71%. Like G8, the dividend alone (if maintained) would provide market-beating returns.

WAM Capital Limited (ASX: WAM)

WAM Capital is a listed investment company run by Geoff Wilson and his investment team. The underlying portfolio that they manage has beaten its benchmark over various time periods by focusing on small capitalisation growth stocks.

The small cap stocks aren’t known for having high-yielding dividends, but WAM Capital itself has converted the growth into income for shareholders.

WAM Capital also has high levels of cash at times to protect from risk and take advantage of volatile share prices when it wants to. At the end of October 2016, 39.1% of its portfolio was in cash.

It’s grown its dividend every year since 2010 and has a grossed up dividend yield of 8.77%

Foolish takeaway

Each of these businesses look as though they can maintain their high dividend for the foreseeable future. Out of the four, Rural Funds Group and WAM Capital are my preference because I think they have a better chance of increasing their dividends and earnings in the short to medium term.

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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED, Select Harvests Limited, and WAM Capital Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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