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Buy these 3 ASX shares to build a diversified dividend portfolio

In this era of low interest rates it can be hard to know what to do with your money. ASX dividend shares seem like a good idea, particularly with the bonus of franking credits.

But many people are also thinking the same thing. That’s why the share prices of supposedly safe dividend shares have been driven up so much – just look at Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD). They look too expensive for me. 

The best thing to do could be to invest in alternative dividend ideas to diversify your income stream:

Duxton Water Ltd (ASX: D2O) 

This company owns water entitlements and leases them out to agricultural businesses.

Water values are likely to keep climbing over the long-term as fresh water becomes more scarce and global demand for healthy, quality, ethically-produced food rises.

Duxton Water could be a good way to get diversified exposure to the entire Australian agriculture sector.

The company is aiming to steadily increase its dividend for shareholders. It’s trading at a 15% discount to its August 2019 net asset value (NAV) with a forward grossed-up dividend yield of 5.7%.

Future Generation Investment Company Ltd (ASX: FGX) 

Future Generation is a listed investment company (LIC) that invests in the funds of ASX-focused fund managers who work for free so that Future Generation can donate 1% of its net tangible assets (NTA) to youth charities.

One of the main aims of Future Generation is to steadily grow its dividend over time. Its underlying portfolio is very diverse due to all of the different investment portfolios it’s invested in, with a slant towards smaller growth shares.

It has a forward grossed-up dividend yield of 6% and it’s valued at an 8% discount to the August 2019 NTA.

WAM Microcap Limited (ASX: WMI) 

WAM Microcap is another LIC, it invests in small cap ASX shares that have market capitalisations under $300 million.

It’s this hunting area which could unearth some of the best opportunities because it’s where few investors go looking. Small businesses are at the start of their growth journeys, so they have the potential to grow the most. But there are plenty of bad apples too, so that’s why I’m happy to leave it to high-performing teams like WAM Microcap to find the gems.

Even WAM Microcap will make mistakes, which is why it’s nice to benefit from a whole small cap portfolio – you get the overall net return rather than worrying about which ones to buy or sell.

WAM Microcap’s portfolio has outperformed the market quite strongly since inception which has allowed the LIC to pay a growing ordinary dividend. It has also paid special dividends in the last two financial years.

WAM Microcap has a grossed-up ordinary dividend yield of 4.7%.

Foolish takeaway

I like all three of these ASX dividend shares, which is why they’re in my portfolio. At the current prices Duxton Water is trading at the most attractive discount, but WAM Microcap could create the strongest long-term returns.

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Motley Fool contributor Tristan Harrison owns shares of DUXTON FPO, FUTURE GEN FPO, and WAM MICRO FPO. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. The Motley Fool Australia has recommended DUXTON FPO. 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.