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Why Rural Funds Group is one of my favourite dividend shares

The Rural Funds Group (ASX: RFF) share price could rise today after another dependable result announced by the agricultural real estate investment trust (REIT).

Here are the key takeaways from the Rural Funds Group half year report to December 2016, compared to December 2015:

  • Earnings per unit rose by 150%.
  • Adjusted Funds From Operations per unit rose by 47.6% to 6.29 cents.
  • The quarterly distribution rose by 8%, with 9.64 cents per unit expected to be the full year distribution.
  • The payout ratio decreased to 76%.
  • Gearing rose from 36.7% in June 2016 to 40.1% in December 2016.

Rural Funds Group is Australia’s only listed agricultural REIT and one of the few property trusts that has managed to increase its share price over the last six to eight months.

It leases out its diverse portfolio of farms to high quality tenants with various contracts in place to ensure growing revenue. Two examples of tenants are Select Harvests Limited (ASX: SHV) leasing its almond farms and Treasury Wine Estates Ltd (ASX: TWE) leasing its vineyards.

Management have been busy over the last 12 months by adding even more diversity to Rural Funds Group’s portfolio with acquisitions of cattle and cotton farms. The more diverse its farm portfolio is, the safer and more reliable its earnings are.

The strategy is clearly working because the above results are very pleasing. Investors are first and foremost looking for a sustainable increase to the distribution. This was delivered with an 8% increase to the distribution whilst the payout ratio decreased.

The growing global population and specifically the Asian middle class is creating a food boom for the Australian companies that can take advantage of demand. Rural Funds Group can harness that demand whilst leaving most of the risk to the tenants.

Should you buy Rural Funds Group shares?

I think Rural Funds Group shares offer defensive, growing income with reasonable potential capital growth too. The shares are no longer the bargain they were 12 months ago, but with continued smart acquisitions of farms I think there’s a good chance it will continue beating the market.

If you’re looking for income stocks then I think this one should be high on your watchlist. However, if farms aren’t your thing then perhaps you’d prefer our number one dividend pick for 2017 instead.

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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. 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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