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Should you buy Rural Funds Group for its 5.9% dividend yield?

Credit: Keith Weller

Investors looking for places to stash their cash against low interest rates will be closely eyeing up rural focused Real Estate Investment Trust (REIT) Rural Funds Group (ASX: RFF) today after the company announced a huge jump in full year revenue and profit.

A quick look at the numbers shows just how strong the performance was for the full year 2016:

Rural Funds Group

FY15

FY16

% Change

Revenue ($mill)

$22.2

$26.5

19.5%

Profit ($mill)

$10

$34.6

246%

NAV/unit

$1.22

$1.43

17%

Annual distribution/unit (cents)

8.59

8.93

4%

So what?

It was a strong year for the fund which took in almost 20% more revenue as it added to its holdings of almond farms during the year.

Hang on, why is profit higher than revenue?

Good spot! Rural Funds Group leases land and orchards to companies including Treasury Wine Estates Ltd (ASX: TWE) and Select Harvests Limited (ASX: SHV). A revaluation of mature almond orchards meant a change in fair value of these assets which was added to the fund’s income statement in the same way you depreciate or write off assets when their values fall.

Notably for investors the company again grew its annual distribution to a total of 8.93 cents per unit, up 4% on the year prior. This is paid out quarterly and is forecast to rise again for the 2017 financial year to 9.64 cents per unit. At the current unit price of $1.63 that will yield 5.9%.

Now what?

As well as an attractive income option, Rural Funds Group will likely add diversification for many investors, providing exposure to agricultural assets like almond orchards, vineyards and cattle property.

But is it an alternative to stashing cash in the bank? The fund announced that its Weighted Average Lease Expiry increased from 12.2 to 13.8 years which adds stability to revenues and ability to meet interest payments on debt, while the properties are becoming more geographically diversified around the country as the fund grows – another plus.

However it is worth noting that the fund’s current unit price has been bid up strongly over the last 12 months and, at $1.63, currently sells for a premium to the $1.43 Net Asset Value (adjusted to include water rights).

This may be acceptable to some income investors chasing the expected 5.9% dividend yield, but it currently offers little margin of safety. I’ll be adding RFF to my watch list to monitor for any weakness in price going forward.

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Motley Fool contributor Regan Pearson has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Bruce Jackson.

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