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Why Rural Funds could be the best ASX dividend share

Rural Funds Group (ASX: RFF) could be the best dividend share on the ASX in my opinion.

Rural Funds is a real estate investment trust (REIT) that invests in farmland and leases it out to high-quality tenants such as Treasury Wine Estates Ltd (ASX: TWE) and Select Harvests Limited (ASX: SHV).

Here are three reasons why I think Rural Funds could be the best dividend share on the ASX:

Decent starting yield

A dividend share only gets to be categorised as one if its has a yield materially more than what you can earn in bank interest. I would say a yield of 4% or higher is appropriate for most shares.

Based on a total FY19 distribution of 10.43 cents per unit, Rural Funds has a yield of 4.6% at the current share price.

Obviously it would be nice if the yield were even higher, but 4.6% is a good starting point.

Distribution growth very likely

Rural Funds Management aims to increase the distribution by (at least) 4% each year through a combination of contracted rental increases, capital expenditure for productivity improvements on the farms, and acquisitions.

A 4% distribution increase each year may not sound like much, but it includes retaining around 20% of earnings for further re-investment. The forecast distribution increase handsomely beats inflation.

All of the above is why Rural Funds has forecast another 4% increase to 10.85 cents in FY20.

Long-term, diverse and defensive

Farmland has been a useful asset for many hundreds of years and I expect it will continue being an excellent investment for a long time to come.

The tenants are the ones with the operational risks on the farms, although Rural Funds does provide water entitlements for the tenants to use in times of drought.

Rural Funds’ property portfolio is spread across 49 properties, six agricultural sectors and multiple climactic zones with a weighted average lease expiry (WALE) of 11.4 years. There’s a lot to like about Rural Funds.

Foolish takeaway

Based on the FY20 distribution, Rural Funds is valued with a yield of 4.8%, which looks pretty good to me. The one drawback to Rural Funds is that it’s valued at a 28% premium to its underlying assets at December 2018. Despite that, I still think it’s a great income share today, but I’d rather buy it much closer to a share price of $2 (or below) than today’s price.

If you want other ideas for income and capital growth then these quality ASX income shares are prime candidates for your 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 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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