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Where to now for income yield investors?

The RBA has just reduced its interest rate and is expected to decrease its interest rates further over the next 12 months.

It seems almost impossible to live off cash in the bank unless you have several million in there.

Therefore it makes sense that people would look a bit further up the risk curve to boost their income. I think shares are the best answer, but not every share with a yield is worth buying.

As interest rates fall, share prices generally rise, so I think it’s still important to assess the value you are getting when you buy shares.

Old faithful dividend shares like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Telstra Corporation Ltd (ASX: TLS) are not the safe dividend shares they used to be in my opinion.

Resource shares like BHP Group Ltd (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) are doing well but are probably near the top of the cycle.

Many investors are flocking to real estate investment trusts (REITs) such as Arena REIT No 1 (ASX: ARF), Rural Funds Group (ASX: RFF) and Goodman Group (ASX: GMG). But these businesses are now trading at high valuations compared to their underlying assets.

Therefore, I think the best approach for dividends might be to invest in diversified investment options like listed investment companies (LICs) and certain exchange-traded funds (ETFs).

The ASX as a whole is known for its dividends, so low-cost ETF options like Vanguard Australian Share ETF (ASX: VAS) or BetaShares Australia 200 ETF (ASX: A200) could be ideas to consider.

Some LICs have reputations for dividends like Whitefield Limited (ASX: WHF), WAM Microcap Limited (ASX: WMI), WAM Research Limited (ASX: WAX) and Naos Emerging Opportunities Company Ltd (ASX: NCC). They all offer income at much higher levels compared to term deposits, with the potential for long-term capital growth as well.

Foolish takeaway

There are plenty of dividend yield options that are still trading at reasonable value with high yields.

Out of the shares I’ve mentioned, I am personally interested in the small cap LICs of Naos Emerging Opportunities and WAM Microcap as long-term investments because smaller businesses, which is their hunting ground, are still at lower valuations whereas bigger shares have recovered. Plus, smaller businesses have the largest potential to generate strong returns if chosen well. 

Where to invest $1,000 right now

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*Returns as of June 30th

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Telstra 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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