3 reasons why Rural Funds is a good ASX share option to buy for income

Here are 3 reasons why Rural Funds Group (ASX:RFF) is a good ASX share option to buy for income.

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I think there are many reasons why Rural Funds Group (ASX: RFF) is a good ASX share option to buy for income, so I will cover three of them for this article.

Rural Funds is the largest agricultural real estate investment trust (REIT) on the ASX.

Here are three reasons why I really like Rural Funds as an income option:

Diversified portfolio

Farmland has been useful for many hundreds of years and will very likely continue to be as long as the farms remain viable and relevant.

To mitigate those risks, Rural Funds has diversified its portfolio into a wider range of farm types in recent years which now includes cattle, cotton, poultry, vineyards, macadamias and almonds.

It has also made sure that its farms are in different climactic conditions and different states. The worst of the regional drought being experienced by some farmers luckily isn't where Rural Funds' farms are located. Rural Funds isn't exposed to the operational risks, but it does own water entitlements for its tenants to use.

High quality tenants

Rural Funds' manager, Rural Funds Management, aims to lease to quality tenants with the financial capability to operate through seasonal and commodity cycles.

Many of Rural Funds' tenants are domestic and international listed entities, their subsidiaries or are large private operators. Two high quality tenant examples include Treasury Wine Estates Ltd (ASX: TWE) and Select Harvests Limited (ASX: SHV).

Steady income growth

Rural Funds has rental increases built into all of its contracts with its tenants. All of the increases are linked to either CPI inflation or a fixed increase of 2.5% per annum. There may be additional increases due to occasional market reviews.

The REIT also has a healthy income payout ratio of around 80% of net rental profit so it can re-invest in productivity improvements at its farms, further improving the rental returns.

Foolish takeaway

Rural Funds is currently trading with a FY19 distribution yield of 4.7%. I think Rural Funds is one of the most dependable income shares on the ASX.

However, its underlying rental profit growth per share will probably be limited to single digits and it's trading at a sizeable premium to its property portfolio value. There are likely quite a few shares on the ASX that will deliver stronger total returns than Rural Funds over the next five years.

Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Treasury Wine Estates Limited. 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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