In this era of low interest rates I can completely understand why some investors are searching for yield.
But, it’s a dangerous game if you end up overpaying for that asset. Capital risk is a risk too! Here are three dividend shares that could be attractive ideas to build a diversified dividend portfolio:
BetaShares FTSE 100 ETF (ASX: F100)
UK shares have gone through a rollercoaster over the past few years. But we finally know that Brexit is happening, there is no more uncertainty. Time will tell whether it helps or hinders the UK, but getting out of limbo is a good thing.
The UK’s blue chips are priced lower than most other markets and they also have quite high dividend payout ratios, leading to an attractive dividend yield.
Some of this exchange-traded fund’s (ETFs) largest holdings include HSBC, Astrazeneca, BP, Glaxosmithkline, Royal Dutch Shell, British American Tobacco, Diageo, Unilever and Rio Tinto. This is a diverse group with attractive underlying dividend yields.
At the end of January 2020 it had a trailing dividend yield of 4.8%.
Duxton Water Ltd (ASX: D2O)
This is the only company on the ASX which purely owns water entitlements, it leases them out to agricultural businesses.
Duxton Water owns a portfolio of $345.5 million of water assets with 66% of its portfolio leases with a weighted average lease expiry (WALE) of 3.2 years. It doesn’t just do long term entitlement leases, it also does forward allocation contracts and spot allocation supply.
Australia’s dry weather has been increasing the value of water, but there is also long term growth of higher-value crops that require more water which can support a higher price of water.
It’s aiming to grow its dividend every year and it has forecast a 2.9 cents per share dividend for September 2020 and a 3 cents per share dividend for March 2021. That forward dividend translates to a grossed-up dividend yield of 5.8%.
Rural Funds Group (ASX: RFF)
This real estate investment trust (REIT) is different to nearly every other REIT on the ASX and it provides a different source of income compared to most other dividend shares like banks or infrastructure.
It owns a variety of farms including almonds, macadamias, cattle, vineyards and cotton. These farms are spread across different climactic conditions and different states, it has good diversification.
And the income? Management aim to increase the distribution by 4% each year thanks to contracted rental increases and investing in productivity improvements at its farms. It has achieved this each year since it listed several years ago.
Rural Funds has a FY21 distribution yield of 5.6%.
All three of these shares have solid yields and aren’t likely to see large income cuts any time soon. As a whole, I prefer Rural Funds because of its contracted rental income and consistent growth with re-investment. Duxton Water is trading at a large discount to its net asset value (NAV), so it also looks quite attractive.
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Returns As of 6th October 2020
Motley Fool contributor Tristan Harrison owns shares of DUXTON FPO and RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. 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.