How I’d invest $10,000 into dividend shares

The income you can get by leaving money in the bank is pretty bad these days. It’s crazy to think that with a million dollars in the bank the most you might be able to get is $30,000, with most accounts offering less of a return than that.

So, what should an income-seeking investor do?

I think Australian shares are the answer. Many experts agree that, on the income side of things, Australian investments are hard to match for the income they can produce.

If I had $10,000 to invest into dividend shares, this is how I’d do it:

WAM Research Limited (ASX: WAX) – $3,000

This is one of several listed investment companies (LICs) run by Wilson Asset Management. Over the past year its portfolio has returned 16.2% before fees, soundly outperforming its benchmark. Over the past five years its portfolio has returned an average of 18.5%, also before fees.

It has generated this impressive performance whilst maintaining a high level of cash, at the end of May 2018 it had 35.9% of the portfolio allocated to cash. The strong performance allows WAM Research to pay an increasing dividend, which is why I’m happy to allocate a good chunk of the money here.

It currently has a grossed-up dividend yield of 8.9%.

Rural Funds Group (ASX: RFF) – $2,500

Rural Funds Group is my favourite real estate investment trust (REIT). It has long-term assets that don’t depreciate in value like an office building does. The management have done an excellent job of locating farmland that it can invest in to improve the capital and rental value.

The rental indexation that is built into all of its contracts with tenants allows Rural Funds to confidently predict that the distribution can be increased by 4% per annum over the long-term. It only has an 80% payout ratio, allowing the business to re-invest for growth.

It currently has a trailing distribution yield of 4.8%.

InvoCare Limited (ASX: IVC) – $3,000

InvoCare is the largest funeral operator in Australia and New Zealand. I believe it represents a good long-term opportunity because death volumes are expected to grow by 1.4% per annum between 2016 to 2025 and then increase by 2.2% per annum from 2025 to 2050.

It is currently significantly investing into its locations so that its facilities can cater for modern demands. Although this is painful in the short-term, management believe that it will lead to sustainable 10% annual earnings per share (EPS) growth in the long-term.

Annual 10% growth to the dividend sounds good to me when it’s currently 4.9% grossed-up.

NAOS Absolute Opportunities Co Ltd (ASX: NAC) – $1,500

This is a LIC run by NAOS. It focuses on shares that have market capitalisations between $400 million and $1 billion. It has been quite successful with the average return per annum before fees being 15.67% since inception in late 2014.

It is steadily growing the dividend and plans to soon start paying dividends quarterly instead of bi-annually. It currently has a grossed-up dividend yield of 8%

Foolish takeaway

I’d normally include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) in an article like this, but it’s currently trading too expensively for me to include it.

The above shares have an average yield of 6.6%, yet also offer compelling growth potential and defensive characteristics.

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Motley Fool contributor Tristan Harrison owns shares of InvoCare Limited, RURALFUNDS STAPLED, WAM Research Limited, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Washington H. Soul Pattinson and Company Limited. 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 Scott Phillips.

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