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4 reasons why Rural Funds (ASX:RFF) is a great ASX dividend share

Growth

I think that Rural Funds Group (ASX: RFF) is one of the best ASX dividend shares that Aussies can buy.

It’s a listed agricultural real estate investment trust (REIT) which owns a variety of farmland across the country.

Here are four reasons why I think it could be a strong income idea:

Yield

For starters, an ASX dividend share has to have a solid starting dividend yield. At the current Rural Funds share price it offers a FY20 distribution yield of 4.6%. However, based on the distribution guidance of 11.28 cents per unit in FY21 it has a forward distribution yield of 4.75%.

Whilst that’s not exactly the biggest yield out there, Rural Funds offers a good yield starting point in this era of low interest rates.

Diversification

For me, I prefer the idea of investing in an ASX dividend share for the long-term. I don’t want to be constantly chopping and changing. The idea is to benefit from the (hopefully growing) dividends each year and steady capital growth.

Not many blue chip ASX shares give me the confidence to invest for the long-term.

We all need food. Farmland has been a useful asset for many centuries. Rural Funds is a good way to diversify your portfolio to farmland. Most food related ASX shares are volatile, whereas as the landlord Rural Funds doesn’t take on the operational risks with things like droughts, that’s on the tenant. However, Rural Funds owns a large amount of water entitlements to help tenants even during tough water times.

The ASX dividend share owns a diversified farmland portfolio. At the moment it owns five types of farmland: almonds, macadamias, cattle, vineyards and cropping (cotton and sugar cane). Within these sectors it owns 61 properties spread across different climactic zones and different states.

I think it’s important for an agricultural business to be strongly diversified like Rural Funds is because it’s hard to know what demand for different commodities will be like in the future. We also don’t know if the drought situation is going to get worse or better over the coming years.

It also has good diversification by its tenants. Based on revenue, Rural Funds disclosed that 78% of its tenants are large entities, with many of them listed, such as JBS, Olam, Australian Agricultural Company Ltd (ASX: AAC), Select Harvests Limited (ASX: SHV) and Treasury Wine Estates Ltd (ASX: TWE).

Productivity improvements

A key strategy for the ASX dividend share is that it is investing in productivity improvements at its farms, particularly its recently-acquired cattle farms.

Between FY17 and FY20 Rural Funds only paid out about 80% of its rental cash profit, allowing it to re-invest the rest into projects that would hopefully increase the valuation and rental potential of its farms.

Rural Funds also has plans to invest in developing macadamia orchards at some of its properties. In some cases this involves converting the area into macadamia farms which will generate more rent for Rural Funds.  

Growth

As an ASX dividend share, Rural Funds need to demonstrate the ability to grow its earnings and distribution for me to want to buy it (or write about it).

Rural Funds aims to grow its distribution by 4% per annum. It’s able to achieve this partly due to the productivity improvement investing, but it’s also down to its contracted rental increases.

Its farms have contracted rental increases with a fixed 2.5% increase or linked to CPI inflation. Some of the contracts have have infrequent market reviews.

Whilst the contracted increases don’t amount to a strong growth rate, it helps the ASX dividend share grow its distribution grow faster than inflation each year.

Foolish takeaway

As I mentioned, the Rural Funds distribution yield is around 4.75%. With how low interest rates are, I think it’s a decent starting place. The Rural Funds share price has gone up strongly in recent weeks, so I’d only start with a small parcel and buy more on price weakness.

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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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