Low interest rates are making it difficult to live off money in the bank. I think ASX dividend shares are the answer.
The official RBA interest rate is now just 0.25%. That’s not going to generate much money even if you have $1 million in the bank. Cash may provide short-term downside protection, but over the long-term inflation can eat away at the ‘real’ value of your money.
I think that ASX dividend shares could be the answer. They can provide a bigger yield and deliver growth.
Here are three income ideas with solid yields:
Brickworks Limited (ASX: BKW)
Brickworks is a diversified property business. It produces and sells building products like bricks, masonry, precast and roofing. It has a strong market position across Australia, it’s the market leader of bricks in Australia.
The ASX dividend share also is the market leader in bricks in the north east of the US after acquiring three brick businesses. The United States is a large long-term opportunity with how big the population is. Brickworks will bring its efficiency to that division over time.
Brickworks hasn’t cut its dividend in over four decades. It has been able to do this because the dividend is entirely funded by the dividends from investment house Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) as well as the net rental from its 50% stake of an industrial property trust.
At the current share price, Brickworks offers a grossed-up dividend yield of 4.75%.
NAOS Small Cap Opportunities Company Ltd (ASX: NSC)
This is a listed investment company (LIC) which is operated by Naos Asset Management.
The benefit of a LIC is that it can invest in ASX growth shares, make investment returns and pay that profit out as a dividend. Good returns can mean it can afford to be an ASX dividend share.
It runs a high-conviction portfolio with around 10 names. An example of what it owns is MNF Group Ltd (ASX: MNF).
At the current share price, NAOS Small Cap Opportunities Company offers a grossed-up dividend yield of 10%. It’s currently paying a 1 cent per share dividend every quarter and it’s aiming to grow its dividend sustainably over the long-term.
It’s also trading at a 16.7% discount to the pre-tax net tangible assets (NTA) at the end of July 2020.
Vitalharvest Freehold Trust (ASX: VTH)
Vitalharvest is an agricultural real estate investment trust (REIT). The ASX dividend share leases large berry and citrus farms to Costa Group Holdings Ltd (ASX: CGC).
Not only does Vitalharvest receive a fixed rental return from its farms, but it also receives 25% of the profit generated from its farms with a profit share agreement with Costa.
Variable rent in FY20 was impacted by a number of “coinciding, unprecedented events” which led to a 30.9% decrease compared to FY19, the lowest variable rental return since FY19. Costa and Vitalharvest’s manager think the worst effects of these events are over.
I think that Vitalharvest’s variable rent can rebound in FY21 and beyond with demand from export markets for quality Aussie agricultural products and an improving situation with the drought.
The ASX dividend share is looking to buy new assets related to food such as food processing and food storage. These new properties will hopefully reduce the downside risk associated with the variable rental component.
At the current share price, Vitalharvest offers a distribution yield of 6.25%. It’s also trading at a 17.6% discount to the net asset value (NAV) per unit at 30 June 2020.
I think each of these ASX dividend shares could deliver solid income over the coming years. Brickworks likely has the most reliable dividend. However, the Naos LIC and Vitalharvest are both trading at large discounts to their underlying value and offer attractively big dividend yields.
Motley Fool contributor Tristan Harrison owns shares of NAO SMLCAP FPO and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Brickworks, COSTA GRP FPO, MNF Group Limited, 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.