3 top dividend shares on my watchlist

I think it’s important for every investor to have a watchlist of shares that they may buy if they become good value. Fund managers can potentially say all shares are on the watchlist, but for us regular investors I think it’s important to have a core list of ideas.

That watchlist could be 20 shares, 30 shares, 40 shares or perhaps more. But the point is that you have a list of quality shares you may buy.

I have a watchlist of dividend shares I’m very interested in, such as these three:

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)

Soul Patts is perhaps one of the best dividend shares on the ASX. Its conglomerate nature and investment style means it’s a well-diversified business with the ability to adapt as time goes on.

It has been an excellent long-term performer and has delivered a growing dividend since 2000.

However, the reason why I’m not currently buying and why it’s on my watchlist is that I think it’s trading quite expensively. There is a potential scenario where TPG Telecom Ltd (ASX: TPM) can’t increase profitably, coal prices decrease and hurt New Hope Corporation Limited (ASX: NHC) whilst a housing downturn affects Brickworks Limited (ASX: BKW).

If Soul Patts was trading at around $16.50 I’d be willing to take that risk, but at above $20.50 I don’t think there’s much margin of safety for me in the short-term. However, I still think it would beat the market over the long-term.

It currently has a grossed-up yield of 3.7%.

Rural Funds Group (ASX: RFF)

Rural Funds is another great income option. It’s a real estate investment trust (REIT) that owns a variety of farm types spread across different states and different climactic conditions. Plus, it has rental indexation built into all of its rental contracts allowing management to predict a 4% increase to the distribution each year.

However, I’m personally wary of buying at the moment for two main reasons.

The first is that rising interest rates are likely to have a negative effect on earnings with increased interest costs and also negatively affect the value of the farmland.

Rural Funds is also trading at a significant premium to the underlying value of the assets. Arguably it should be trading at its NTA, or at least a much smaller premium.

It currently has a distribution yield of 4.7%.

Naos Emerging Opportunities Company Ltd (ASX: NCC)

This is the listed investment company (LIC) that Naos has been running the longest. It focuses on the smallest part of the market, it looks at shares with market capitalisations of under $250 million.

Over the past five years its portfolio has returned 14.59% per annum before fees but after operating expenses. However, over the past year it has underperformed the S&P/ASX Small Ordinaries Accumulation Index due to the very strong performance from the index.

I’m waiting on buying Naos Emerging Opportunities shares because in a downturn small caps are invariably punished more than blue chips, even if the profit is hurt by the same amount. There could be a better time to buy its shares in the future.

It currently has a grossed-up dividend yield of 8.8%.

Foolish takeaway

I firmly believe that all three are solid dividend ideas. However, I’m also looking to beat the market – so I need good capital growth too. I don’t think the current values of the above three shares give a big chance of market-beating returns in the short-term to medium-term.

However, one top income share that I do think could be good for total returns is this exciting business which is just expanding into Asia.

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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED, TPG Telecom Limited, 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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