Rural Funds Group (ASX: RFF) could be a quality ASX dividend share to consider for a few different reasons.
If readers haven't heard of Rural Funds before, it's a real estate investment trust (REIT) that owns farmland properties that it leases out.
There are a number of reasons why it could be a good idea to consider this agricultural landlord for income:
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Diversification
Unlike a residential investment property where all of the value is tied up in one piece of real estate, Rural Funds owns a portfolio of assets. It's diversified in several different ways.
It has farming properties across several different sectors including cattle, vineyards, almonds, macadamias and cropping (sugar and cotton).
The farms are also diversified geographically – they are spread across different states and in different climactic conditions. Rural Funds also owns a large portfolio of water entitlements to ensure that its tenants have enough water for their needs.
Some of Rural Funds' tenants include: Olam, JBS, Select Harvests Limited (ASX: SHV) and Treasury Wine Estates Ltd (ASX: TWE).
Income growth
One of the main goals of Rural Funds is to increase its distribution to investors by 4% per annum. It has been successful with this target ever since it listed several years ago.
One of the main ways that Rural Funds achieves this growth is thanks to the rental growth that is built into the contracts it has with its tenants. Most of the contracts either have a fixed annual rental increase or it's linked to CPI indexation, with some contracts having market reviews.
In FY21, Rural Funds grew its distribution by 4% to 11.28 cents per unit. In FY22 it has guided that it will increase the distribution by 4% to 11.73 cents per unit. That translates to a forward distribution yield of 4.3%.
Investing for growth
Rural Funds is not just passively growing its profit from rental increases. It is taking measures to grow its rental profit by investing for growth.
For example, at its cattle properties it has invested in a number of things like water points, pasture improvement, cultivation areas, irrigated areas and grazing areas.
Another key element of the investing is changing the land to higher and better use to increase total returns. For example, it's currently turning some of its cropping farms into macadamia orchards. Planting of 1,000 hectares is expected to be completed by June 2022. Planted orchards are more attractive to tenants and may be leased at higher rates.
What is the Rural Funds share price's underlying value?
Over the last six months the Rural Funds share price has risen around 16%. FY21 saw the pro forma adjusted net asset value (NAV) per unit increase 13% to $2.20. That means the REIT is valued at a premium of around 23.6% to its adjusted NAV.
