With a significant proportion of overall share market returns historically coming from dividends, it is important to incorporate a healthy proportion of dividend-paying shares in your portfolio, ideally ones with adequate cash flow to enable increases above the rate of inflation over time.
These 3 ASX shares have demonstrated these characteristics and are great options to look at if you're thinking about building an income portfolio. Buying these shares, and holding them for the next ten years, while re-investing the dividends could be, thanks to the magical powers of compound interest, the start of a potent income-generating portfolio.
Rural Funds Group (ASX: RFF)
Rural Funds Group is a REIT, or real estate investment trust. REITs are stocks that typically hold mostly real estate assets. Rural Funds' specialises in agricultural farmland, including cattle, cotton, chickens, macadamias and vineyards.
I like Rural Funds for its income potential and security: the market for food, wine and clothes isn't going away anytime soon. In addition, Rural Funds' average lease is over 13 years, with many having inflation clauses written into their contracts. This has enabled the company to increase its dividend annually since listing in 2014 and is currently sitting on a yield of 4.24%
InvoCare Limited (ASX: IVC)
InvoCare is the largest funeral provider in Australia and also has a presence in New Zealand and Singapore. It has a market cap of $1.56 billion and turnover around $400 million a year. The funeral market is a highly decentralised industry, but InvoCare has managed to establish a significant market share using strong and multilayered brands, such as White Lady Funerals.
The foundation of InvoCare's profitability is death rates. Much of the negative movement of InvoCare's share price in 2018 revolved around the lower than expected number of deaths in Australia, which undershot the company's expectations and resulted in lower profits. This will most likely prove a temporary dip, as InvoCare expects death rates to increase at a rate of almost 3% annually by 2034. InvoCare is currently yielding 2.62% before franking but I believe it to be one of the most reliable dividends in the ASX. With the ageing population in Australia, I expect this dividend to steadily increase over time to boot.
BHP Group Ltd (ASX: BHP)
BHP is one of the largest mining companies in the world. With a market capitalisation of $96.59 billion and over 62,000 employees, BHP has been synonymous with Australian mining since its founding back in 1885 in Broken Hill, NSW. I like BHP because the company is one of the lowest-cost producers of iron ore, coal, petroleum and copper in the world. With this low-cost base, BHP is well poised to reward shareholders handsomely whenever commodity prices have a significant upswing, as they have in the past with special dividends and share buy-backs.
The four commodities that underpin BHP are all essential commodities for global growth. Demand for iron ore and coal from China over the past decade has been almost insatiable, providing over 52% of BHP's revenue in the 2018 financial year. The company should continue to profit in the same way from the rise of other emerging markets in the years and decades ahead, ensuring a growing stream of dividends for its shareholders. Its current yield of 4.11%, is also nothing to turn your nose up at if you are looking at opening a position.
Foolish Takeaway
If you are looking to grow a solid and growing income portfolio, I believe these ASX stocks are a great place to start. All three of these companies already provide a significant income base and I think will continue to grow well into the future.
