Rural Funds has plenty of income potential for the long-term.
The post 3 reasons why Rural Funds (ASX:RFF) could be a really good ASX dividend share appeared first on The Motley Fool Australia. –
What does Rural Funds own?
Its property portfolio is focused on agricultural properties around Australia.
At the moment it’s invested in five different farming sectors. Those are: cattle, vineyards, almonds, macadamias and cropping (cotton and sugar).
The agricultural sectors it’s invested in are not fixed. A few years ago it didn’t own any cattle properties. Now, cattle is one of the biggest allocations. Rural Funds used to own poultry assets, but it has divested those properties.
Here are three reasons why Rural Funds could be an interesting ASX dividend share:
Its farms are located in multiple states. They are also spread across different climactic conditions. This can help reduce the risks of the portfolio as a whole when looking at the potential downsides of each individual farm. It has at least one farm across most of the Australian states.
Rural Funds doesn’t rely on just one or two tenants. It has a number of large, quality tenants including Select Harvests Limited (ASX: SHV), Treasury Wine Estates Ltd (ASX: TWE), JBS, Australian Agricultural Company Ltd (ASX: AAC), Stone Axe, Olam and Queensland Cotton.
The agricultural REIT has a long weighted-average lease expiry (WALE) of around 11 years. That means that tenants are contracted to stick around for a long time.
Rural Funds aims to increase its distribution growth of 4% per annum for shareholders. It has been doing this for several years in a row since it listed.
How does it achieve this growth? The income growth is achieved through lease indexation (contracted rental growth), productivity improvements and with the conversion of assets to higher and better use.
Some of the contracted rental growth experiences a fixed 2.5% annual increase, with other farms having rental increases linked to CPI annual inflation growth.
The ASX dividend share has provided a distribution forecast increase of 4% for FY22.
Rural Funds pays out a fairly high percentage of its rental profit each year to shareholders. That means the Rural Funds distribution yield is relatively high compared to a typical ASX share.
Using the distribution forecast of 11.73 cents per unit in FY22, that puts the forward distribution yield on 4.6%.
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Returns As of 15th February 2021
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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Treasury Wine Estates Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.