Is the Rural Funds Group share price a buy for solid income?

The Rural Funds Group (ASX: RFF) share price hasn’t done much so far in 2018, although it has grown by an impressive 18.8% over the past year, which doesn’t include the quarterly income distributions.

What does Rural Funds do?

It’s a real estate investment trust (REIT) that investors into farmland properties and leases them out to tenants. It has a variety of farm types including cattle, poultry, vineyards, cotton, almonds and macadamias.

Does it provide solid income?

It leases its farms to many high quality tenants like ASX-listed Select Harvests Limited (ASX: SHV) and Treasury Wine Estates Ltd (ASX: TWE). I don’t think of income being ‘solid’ based on the yield, but on the reliability of the income and growth potential.

Rural Funds has rental indexation increases built into all of its contracts, most of the increases are either fixed at 2.5% or CPI-linked. Management confidently predict a 4% increase to the distribution each year. The weighted average lease expiry of its rent contracts is 12.5 years, which is one of the longest in the REIT sector.

Is it good value today?

Rural Funds reports its adjusted net tangible assets per unit (NTA) every so often, essentially saying what the underlying value of each unit is. The adjustment is to disclose the assets with the water entitlements at market value instead of cost value.

At 31 December 2017 the adjusted NTA was reported as $1.60. Today’s closing share price was $2.21, suggesting the shares are currently trading at a 38% premium. It’s normally not a good move to buy something at a 38% premium to the underlying assets.

Is it a buy?

It clearly wouldn’t be a value buy today. On the income side of things it’s currently trading with a yield of 4.46%, this is better than interest from a bank account but not as generous as the yield was in previous years. For now, I’d avoid Rural Fund and focus on other income stocks.

A great income choice could be this top dividend stock which is growing its dividend at a very fast rate, that’s why it’s in my portfolio.

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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. 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 Scott Phillips.

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