Alternative assets can generate decent returns with not much correlation to the economy. So, alternative ASX shares could be a clever way to invest for defensive income.
One of the most unique shares on the ASX is Duxton Water Ltd (ASX: D2O). It owns water entitlements and it may benefit from the rising demand from high-value, high-water demand crops like almonds. However, the ongoing ACCC uncertainty makes me want to wait until the report is released before buying any more Duxton Water shares.
Meanwhile, there are other alternative ASX shares that can provide defensive income:
Rural Funds Group (ASX: RFF)
Rural Funds is a farmland real estate investment trust (REIT). Farms offer quite different return profiles compared to shopping centres or office buildings. It owns a variety of farm types including almonds, macadamias, cattle, vineyards and cropping (sugar and cotton).
Farms have been useful assets for many hundreds of years. We all need food. Rural Funds has a number of large, quality tenants like Select Harvests Limited (ASX: SHV), Treasury Wine Estates Ltd (ASX: TWE), Olam and Australian Agricultural Company Ltd (ASX: AAC).
The alternative ASX share receives steadily-growing rent from its tenants, which helps management confidently predict that the distribution can grow by 4% per annum.
Rural Funds actually owns a large amount of water entitlements which are leased to tenants. So whilst the alternative ASX share doesn't carry the operational risks of issues like droughts, it can help the tenant through drought problems.
At the current Rural Funds share price, it offers a FY21 distribution yield of 4.9%.
Blue Sky Alternatives Access Fund Ltd (ASX: BAF) / WAM Alternative Assets Limited (ASX: WMA)
The Blue Sky dramas will soon be over for this listed investment company (LIC) with management changing to Wilson Asset Management (WAM).
The alternative ASX share will invest across various assets including water, agriculture private equity, real estate, private debt and infrastructure. Some of these assets are only available to wholesale and institutional investors.
The LIC aims to deliver good total returns with a meaningful dividend yield.
At the end of August 2020 it had pre-tax net tangible assets (NTA) per share of $1.08, meaning it's trading at a 16.7% discount.
Whilst I don't expect this LIC to generate as strong returns as some of WAM's other LICs like WAM Microcap Limited (ASX: WMI) and WAM Leaders Ltd (ASX: WLE), I think it could produce decent total returns.
Vitalharvest Freehold Trust (ASX: VTH)
Vitalharvest is another agricultural REIT. The alternative ASX share owns some of the largest berry and citrus farms in Australia.
It receives a fixed rent and variable rent from its tenant, the large horticultural business Costa Group Holdings Ltd (ASX: CGC). The variable rent is a 25% profit share of the profit generated from the farms.
Some one-off issues, as well as the (lessening) drought have hurt the variable rent in FY20. However, I think that those issues are going to ease and we're going to see a return to good profitability for Vitalharvest.
Another thing that's exciting about the alternative ASX share is that it now has a new manager – Primewest Group Ltd (ASX: PWG). Primewest is going to look for food-related assets that can provide a more consistent return. It will still look for potential farm acquisitions, but other options could be food processing, food storage and food logistics properties.
At the current Vitalharvest share price it's trading at a 14.3% discount to the net asset value (NAV) per unit. It also offers a trailing distribution yield of 6.1%. But I think the distribution is going to rise from here as the variable profit hopefully returns to normal.