There are a number of ASX dividend shares that can build a diversified income portfolio.
I'm not talking about the typical ASX income shares like Westpac Banking Corp (ASX: WBC), Woodside Petroleum Limited (ASX: WPL) and Harvey Norman Holdings Limited (ASX: HVN).
I think dividend shares should offer something quite different to the ASX as a whole. By that, I mean the ASX is focused on financials and resources – it needs to be something other than those industries.
Here are three ideas:
Duxton Water Ltd (ASX: D2O)
Duxton Water is the only business on the ASX to give pure exposure to water entitlements. Coronavirus or not, agricultural businesses will need to continue producing food supplies for Australians (and internationally).
The dry conditions over the past few years have caused water entitlements to become more valuable. Over the longer-term, higher value crops like almonds should be able support higher prices for water entitlements.
As for the dividend, Duxton Water has been steadily growing its dividend since it started paying one a few years ago. The Board want to pay a growing dividend if possible.
It's trading at a 27% discount to the February net asset value (NAV) and currently offers a forward grossed-up dividend yield of 6.5%.
Rural Funds Group (ASX: RFF)
This is a real estate investment trust (REIT) which invests in a number of different farm types including cattle, cotton, almonds macadamias and vineyards. This diversification strategy is smart because it lowers the risk of any individual sector and opens up more acquisition opportunities for consideration.
Those farms are spread across different states and climactic conditions to further lower risk.
Most of Rural Funds' rental contracts have rental increases which are either linked to a fixed 2.5% increase or CPI inflation, with market reviews. Productivity improvement investments also help grow the rental income. Built-in growth is very useful.
Rural Funds aims to increase its distribution by 4% each year and currently offers a forward distribution yield of 6%.
Future Generation Investment Company Ltd (ASX: FGX)
Future Generation is a listed investment company (LIC) which invests in the funds of ASX-focused fund managers. There are no management fees or performance fees involved with this LIC, so that 1% of net assets can be donated to youth charities each year.
The 20-ish funds each offer a portfolio of shares, so Future Generation has excellent underlying diversification.
Future Generation has grown its dividend each year for the past few years and its strategy could continue to provide defensive returns (particularly due to the 'absolute return' funds).
It currently offers a grossed-up dividend yield of 7.7%.
Foolish takeaway
Each of these dividend shares offers something very different to the typical ASX share. At today's prices I'd probably go for Future Generation for the high yield and diversification.
