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Why you should own this dividend share instead of Wesfarmers

Credit: GotCredit

In my opinion, Wesfarmers Ltd (ASX: WES) is not the best dividend share on the ASX. I believe there are better ASX investment options out there.

I think that Rural Funds Group (ASX: RFF) is a better choice for income for a number of reasons. It’s a real estate investment trust (REIT) that owns farmland and leases it out.

Firstly, Rural Funds Group has clearly provided guidance of the income it will pay over the next six months. Certainty is of income is very comforting. Rural Funds aims to pay 2.608 cents per unit in each of the next two quarters.

Wesfarmers recently divested Coles Group Limited (ASX: COL), so the new Wesfarmers dividend will be lower. We just don’t know how much lower yet. Management have said the combined dividend will be what Wesfarmers would have paid as a combined business.

Rural Funds has a key objective of trying to increase the distribution by 4% a year, which is supported by the rental indexation built into its contracts through CPI-inflation rises or a fixed 2.5% increase.

Wesfarmers has the potential to grow its income faster than 4%, but its earnings are also more at risk of falling. The declining Australian housing market may start hurting the sales of Bunnings, Target and Officeworks if households start spending a bit less.

It’s true that Wesfarmers has a variety of businesses, which are largely retail (including Kmart with the businesses mentioned above). But, they are all exposed to roughly to the same risks.

When you look at Rural Funds’ farms its properties are spread across a variety of food sectors: cattle, poultry, vineyards, cotton, almonds and macadamias. Those farms are spread across different climates and different states. To me, it seems like Rural Funds is better diversified.

Wesfarmers has been operating for over a century and farmland has been a useful asset for many centuries. They both have long-term investment potential, but I fear the online competition may harm Wesfarmers in the medium-term. Whereas farms are likely to keep going up in value as demand for food from a growing population increases.

Foolish takeaway

It’s likely that over the next 12 months Wesfarmers will pay out a higher yield than Rural Funds, but I think Rural Funds is more reliable and has a much better chance of growing its income year after year.

However, I’m personally not jumping to buy Rural Funds shares right now because it’s trading at a fairly significant premium to its underlying value.

Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Wesfarmers Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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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