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How I’d invest $5,000 into dividend shares

Income is a very important part of returns for a lot of people. Dividends are generally less volatile than share price movements and can represent some, if not all, of a person’s income in retirement.

If I were to invest in dividend shares I’d want to go for businesses that have reliable dividend histories and have every chance of growing at a good rate over the coming years.

But, the potential dividend ideas also have to pay a good yield, or else I may as well keep cash in the bank.

Here are three ideas to invest $5,000:

Naos Emerging Opportunities Company Ltd (ASX: NCC) – $1,000

This is a listed investment company (LIC) operated by Naos Asset Management. I like the Naos way of doing things – holding a small number of high-conviction ideas that the investment team thinks will outperform the index. Why hold any shares unless you think they’re market-beaters?

This particular LIC invests in small caps with market capitalisations under $250 million. The good thing about small caps is that they can grow by many multiples before they reach blue chip size.

Naos has increased this LIC’s dividend every year since the second half of FY13 and it currently offers a grossed-up dividend yield of 8.1%.

Paragon Care Ltd (ASX: PGC) – $2,000

Paragon is one of my favourite small cap ideas. It’s a small cap healthcare item supplier to clients like hospitals and aged care facilities.

One of the main reasons I like Paragon is that it has an Amazon-like platform for all clients to order whatever products they need such as beds or devices. This provides good scale benefits. It’s not as good as good as Amazon, of course.

Paragon is steadily growing by making acquisitions to increase the number of items it can offer. That means clients can steadily buy more of their needs on the Paragon platform over time.

It has increased its dividend each year since 2013 and it currently has a grossed-up dividend yield of around 6%.

Challenger Ltd (ASX: CGF) – $2,000

Challenger is my favourite financial business. It offers annuities to retirees, turning their capital into a guaranteed source of income. Some annuities are for life.

The number of people over 65 is projected to grow by 40% over the next decade, which should be a good boost to Challenger. The growing superannuation pool of assets will help grow the size of each annuity over the long-term too. Challenger has genuine tailwinds.

Australia’s Federal Government recently announced changes in the budget, requiring all superannuation funds to offer members an option of guaranteed income for life. Challenger should be a major beneficiary from this as it’s the clear market leader in Australia.

Challenger has increased its dividend each year since the GFC and currently offers a grossed-up dividend yield of 4.9%.

Foolish takeaway

All three of these dividend shares have good yields and already have a good track record of consecutive dividend increases.

At the current prices I’d be very interested in buying shares of both Challenger and Paragon, they are both close to 52-week lows.

Another dividend share I’d be very interested in investing in is this ASX income share which just grew its dividend by 20% in this reporting season.

Breaking news: ASX companies set to raise dividends!

It's been a nail-biter of a reporting season here in the first half of 2018.

But the real action, in my opinion, is what companies are doing with dividends.

What does this mean for you? Well there is one stock I've found that could very well turn out to be THE best buy of 2018. And while there's no such thing as a 'sure thing' when it comes to investing - this ripper might come as close as I've ever seen.

Click here it's FREE!

Motley Fool contributor Tristan Harrison owns shares of Challenger Limited and Paragon Care Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool Australia has recommended Paragon Care 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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