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Is the Wesfarmers or Rural Funds share price a buy for dividend income?

Is the share price of Wesfarmers Ltd (ASX: WES) or Rural Funds Group (ASX: RFF) a buy for dividend income?

I think they could be two of the best dividend shares within the ASX 300.

We have seen the dividends dramatically cut from businesses like National Australia Bank Ltd (ASX: NAB) and Sydney Airport Holdings Pty Ltd (ASX: SYD).

But some businesses could be much better dividend options for a few different reasons:

Earnings reliability

I think both Wesfarmers and Rural Funds have shown they have resilient earnings during this difficult period.

Resilient earnings should mean more resilient share prices for Rural Funds and Wesfarmers.

Wesfarmers boasted of a strong performance during FY20. In the second half of FY20 Bunnings sales were up 19.2%, Officeworks sales were up 27.8%, Catch’s gross transaction value was up 68.7%, Kmart sales were up 4.1% and Target sales were down 1.8%.

A business which generates solid revenue should translate into solid profit and the board can decide to pay a good dividend.

Agricultural real estate investment trust (REIT) Rural Funds reaffirmed its guidance of adjusted funds from operations (its cash net rental) of 13.5 cents per share. I think having no change to your earnings guidance definitely counts as being resilient. It also helps that it has a diverse farming portfolio

I think it’s no surprise that the Wesfarmers and Rural Funds share prices are trading at close to their pre-COVID-19 levels.

Growth plans

Shares aren’t term deposits that deliver a flat return year after year. If a business isn’t growing then I think it’s in danger of going backwards and becoming a dud share with a dropping share price.

I like the direction that Wesfarmers is going. It’s trying to diversify its operations with lithium mining and online retail. I like that Bunnings has a national online retail presence. The Catch acquisition was a great buy considering how much ecommerce has exploded due to COVID-19.

For the Wesfarmers and Rural Funds share prices to rise over time, they must grow their profit and business values.

Rural Funds has actually announced some acquisition news today. It’s buying 5,409 ha of sugar cane farms with the associated plant and equipment as well as 8,060 ML of water entitlements for $81.1 million.

The REIT plans to turn approximately 2,200 ha of that into macadamia orchards and a substantial portion of the remaining area able to be used for cropping. This deal will be funded from an increase of the debt facility.

Commitment to shareholder returns

Rural Funds still plans to pay a FY21 distribution per unit of 11.28 cents. Wesfarmers is projected to pay $1.50 of dividends per share in FY21.

Both of these businesses are committed to paying out good levels of profit each year to shareholders.

Rural Funds tries to increase its distribution by 4% each year whilst also retaining some of the cash rental profit each year to invest in growth. Wesfarmers doesn’t have such a specific dividend growth target, but as its earnings grow over time it can fund a higher dividend.

Current dividend yields

Based on the above FY21 dividend expectations, at the current share price Wesfarmers currently has a forward grossed-up dividend yield of 4.7%. At today’s Rural Funds share price it offers a forward distribution yield of 5.6%.

These are not big yields, but considering the RBA interest rate is now just 0.25%, I think those starting yields are pretty good. Don’t forget, those dividends will hopefully grow over time. So the FY21 yield is just the starting yield on cost.

Foolish takeaway

I like both of these ASX shares as potential long-term investments. However, I think the resurgence of COVID-19 may cause a short-term hit to Wesfarmers. Whereas, hopefully, Rural Funds will be largely unaffected. So at the current share prices I think I’d go for Rural Funds first.

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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. 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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