Where I'd invest $10,000 in ASX shares for passive income

These stocks look to me like top picks for dividends.

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ASX shares can be a great choice for passive income because of their ability to pay good dividend yields and deliver long-term growth.

Businesses have the capability of investing in themselves, growing their operations and potentially creating new products, services or locations.

High dividend yields are attractive, but I want to ensure there's a good chance the businesses can grow earnings too. I like a number of stocks for passive income, but these three are among my favourites.

Rural Funds Group (ASX: RFF)

This business is a real estate investment trust (REIT) that owns various farm types, including almonds, macadamias, cattle, vineyards, and cropping.

Rural Funds is expecting to pay a distribution of 11.73 cents per unit, which equates to a distribution yield of 5.7%.

Farmland has been an essential asset for hundreds and thousands of years. I think it will be a good investment for at least the rest of my lifetime.

Its rental income is benefiting from steady increases with rental contracts having a fixed annual increase, or linked to inflation, plus the occasional market review.

Rural Funds is regularly investing in its farmland to improve the productivity for tenants, such as improved water access or better infrastructure. It's currently investing in a new macadamia farm which could unlock a lot more rental income.

At 31 December 2023, it reported an adjusted net asset value (NAV) of $3.07 – the Rural Funds share price is at a 33% discount to this, which is attractive to me for generating higher passive income.

Metcash Ltd (ASX: MTS)

Metcash supplies a large number of independent food and drink retailers around Australia including IGAs, Cellarbrations, The Bottle-O, IGA Liquor, Porters Liquor, Thirsty Camel, Big Bargain Bottleshop and Duncans. It also supports bars, pubs, restaurants and hotels.

It also has a hardware division that has a number of brands including Mitre 10, Home Timber & Hardware, Total Tools, Bianco Construction Supplies and Alpine Truss.

I think these businesses, collectively, offer quite defensive earnings. Metcash also appears to be an obvious beneficiary of population growth in Australia. The company is investing in operations to be more efficient and offer better customer service, such as new warehouses. It's also steadily acquiring bolt-on businesses to help grow and diversify earnings.

With a dividend payout ratio of 70% of underlying net profit after tax (NPAT), the company can usually provide a high dividend yield.

It could pay a grossed-up passive income yield of 7.9% in FY25, according to Commsec.

Brickworks Limited (ASX: BKW)

Brickworks is the biggest brickmaker in Australia and the northeast of the US. The ongoing population growth in these two countries is helpful for increasing long-term demand for housing, which can then assist Brickworks' earnings.

The company has grown or maintained its dividend every year for almost 50 years, which is a very praiseworthy record.  

Its investment division and its property holdings alone pay the cash flow needed for Brickworks' passive income.

Excitingly, Brickworks' industrial property trust is expecting to see good revenue growth in the next five years as more large warehouses are completed and rented out. Plus, the rental income is growing from organic rental increases. In the next two years, Brickworks is expecting the property trust rent to increase by 18% to $203 million.

For FY24, the estimate on Commsec suggests it could pay a grossed-up dividend yield of 3.6%.

Motley Fool contributor Tristan Harrison has positions in Brickworks, Metcash, and Rural Funds Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks. The Motley Fool Australia has positions in and has recommended Brickworks and Rural Funds Group. The Motley Fool Australia has recommended Metcash. 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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