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3 must-have ASX income shares for your portfolio

income dividend shares
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I think there are some ASX income shares which are must-haves for any investor that is focused on generating dividend income.

The official RBA interest rate is now just 0.25%. That has caused the income we can get from bank saving accounts to drop significantly.

I think there are some ASX shares that should be in most income investor portfolios:

WAM Microcap Limited (ASX: WMI)

WAM Microcap is a listed investment company (LIC). I really like LICs as ASX income share ideas.

When you limit yourself to just operating businesses that have a higher dividend yields then you may find that plenty of them offer average (or even inferior) total returns because they have low growth potential (and a low price/earnings ratio) and/or they have a high dividend payout ratio with limited re-investment opportunities.

LICs can invest in growth shares (or anything else), make capital gains and then pay out some of those returns as a smoothed (and hopefully growing) dividend.

WAM Microcap is one of the best-performing LICs. Since inception in June 2017, WAM Microcap portfolio’s gross return was 17.8% per annum. That’s before expenses, fees and taxes – so the net return has been a bit less. However, the gross portfolio return was 11.6% better per annum than the S&P/ASX Small Ordinaries Accumulation Index. That’s great outperformance.

The ASX income share has steadily increased its dividend since FY18 and it has also paid a special dividend each year too.

Excluding special dividends, WAM Microcap offers a grossed-up yield of 5.8% at the current WAM Microcap share price.

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)

In terms of dividend reliability, I think Soul Patts could be the best ASX income share around.

Soul Patts has grown its dividend every year since 2000. No other ASX share has a record as good as that. Soul Patts has actually paid a dividend every year since it listed in 1903, including through wars and other recessions.

The investment house owns large positions in a number of different shares including TPG Telecom Ltd (ASX: TPG), Brickworks Limited (ASX: BKW), Australian Pharmaceutical Industries Ltd (ASX: API), New Hope Corporation Limited (ASX: NHC), Milton Corporation Limited (ASX: MLT) and Bki Investment Co Ltd (ASX: BKI).

Most of Soul Patts’ investments pay annual dividends to Soul Patts each year. The ASX income share can then pay out most of those dividends to its own shareholders, after paying for expenses. It retains about a fifth of that net cashflow to invest into more opportunities.

At the current Soul Patts share price it offers a grossed-up dividend yield of 4.2%.

Future Generation Investment Company Ltd (ASX: FGX)

Future Generation is another LIC, but this one is very different to WAM Microcap. But I think it could also be a good ASX income share pick.

It invests in the funds of fund managers that invest in ASX shares. Its investment choices are meant to be into the best investment managers in Australia.

But those fund managers work for free for Future Generation so that the LIC can donate 1% of its net assets per annum to youth charities. That means no management fees and no performance fees. These donations are particularly important during times like this COVID-19 period.

Since inception in September 2014, the Future Generation portfolio’s gross return has been 2.2% per annum better than the S&P/ASX All Ordinaries Accumulation Index. That’s before expenses, fees and taxes.

Some of its biggest fund manager allocations are with Bennelong, Paradice, Regal, Eley Griffiths and Wilson Asset Management. Future Generation is invested in lots of shares through the underlying funds, so Future Generation has great diversification. 

At the current Future Generation share price it offers a grossed-up dividend yield of 6.8%.

Foolish takeaway

I think all three of these ASX income shares are great options for dividends. At the current prices I’d probably go for Soul Patts first with its reliable dividend – WAM Microcap appears to be trading at bit of a premium to its net tangible assets (NTA) now.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool contributor Tristan Harrison owns shares of FUTURE GEN FPO, WAM MICRO FPO, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Brickworks and Washington H. Soul Pattinson and Company 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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