There aren’t that many shares on the ASX that I think are long-term market-beating income ideas. Most market-beaters are growth shares that consequently trade on a high valuation and have a low dividend.
I believe real estate investment trust (REIT farm landlord Rural Funds Group (ASX: RFF) is one of the best income ideas on the ASX for the following reasons:
Diverse farm portfolio
Rural Funds owns a diverse array of farm assets spread across cattle, almonds, macadamias, cotton, poultry and vineyards.
Not only are the farm types diverse, but they are also spread across different climactic conditions.
Rural Funds’ management said that business is good despite the drought conditions experienced in regional Australia. Some of Rural Funds’ locations have actually received more rainfall than average.
Quality rental income with indexation
Nearly all of Rural Funds’ tenants are either listed entities, overseas or in Australia, like Select Harvests Limited (ASX: SHV) or Treasury Wine Estates Ltd (ASX: TWE), or related to Rural Funds Management – Rural Funds’ manager. High quality tenants means rental arrears are very unlikely.
Rural Funds has rental indexation built into nearly all of its contracts. They are linked to either a fixed 2.5% increase or CPI increase. This means Rural Funds can look forward to slow-and-steady long-term income growth.
Long-term management goals and investment process
Farmland has been a useful asset for many hundreds of years and I imagine will continue to be for at least the next century.
Because farms don’t ‘depreciate’ like a building they can technically last forever. It’s the tenants that take on the operating risks.
Rural Funds’ management confidently predicting long-term annual growth of the distribution of 4% each year. Whilst this isn’t a lot, it comfortably outperforms inflation.
I think Rural Funds is wise to keep about 20% of earnings to re-invest back into the business for productivity gains and higher rental income over time.
A useful bonus that Rural Funds provides its tenants is the use of water entitlements. Around a quarter of Rural Funds’ total adjusted assets are water entitlements. This is useful for tenants and also should provide long-term asset growth for Rural FUnds as fresh water becomes more valuable over time.
Rural Funds currently offers a FY19 distribution yield of 4.77%. It’s trading at a fairly hefty premium to the underlying value of the assets, but I think Rural Funds is the best real estate investment trust (REIT) on the ASX and I imagine it will be one of my longest-term investments.
Whilst I would prefer to have bought some more shares around $2, I’d be happy enough to buy a small parcel today and accumulate when the forward yield is above 5%.