In my opinion, Rural Funds Group (ASX: RFF) could be the best dividend share on the ASX today.
Rural Funds is a farmland real estate investment trust (REIT). Its share price has been crunched 27% since the start of August when it came under attack from a short seller.
The REIT defended its financials well and recently decided to sell its poultry assets. A property valuation is a best guess by the valuer, it’s only when a property is sold do we see the true value. The poultry assets are going to be sold for $72 million, which is very close to the price listed on Rural Funds’ balance sheet.
I bought some shares before the poultry divestment news and the sale price gives me even more confidence of the asset values.
So here are three reasons why I think Rural Funds could be the best dividend share:
Good starting yield with growth potential
Using the forecast FY20 distribution of 10.85 cents per unit, Rural Funds has a FY20 distribution yield of 6.3%.
There is no rulebook on what yield a share needs to have before it can be classified as a true dividend share, but I think above 6% definitely counts.
Unlike the big domestic ASX banks and Telstra Corporation Ltd (ASX: TLS), Rural Funds is growing its payment to shareholders every year. The annual growth target is 4% which is funded by contracted rental increases and re-investment into the farm properties.
Diversification of farms
Owning just one building or farm is not a good idea for diversification. Owning a variety of farm types across the country in different climactic conditions is a good way to reduce risk.
Rural Funds owns cattle, almonds, poultry, macadamias and cotton properties in various states. It will soon own cattle properties in Western Australia.
Cheaper than its reported net asset value
The sale of the poultry assets and purchase of cattle assets will see the adjusted net asset value (NAV) per share reduced to $1.79. Compared to the current share price of $1.73 I think the 3.5% discount looks pretty attractive, particularly when most other REITs are trading at expensive premiums to their underlying values.
Rural Funds is trading cheaper than its assets with a good yield and with decent income growth prospects for the foreseeable future. I’ll probably buy some shares if the price stays at this level until the next time I have some money to invest.
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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 Telstra 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.