Rural Funds Group (ASX: RFF) could be one of the most compelling ASX dividend shares available to Aussie investors.
Rural Funds is a farmland landlord operating through a real estate investment trust (REIT) structure.
Here are three reasons why Rural Funds could be considered as such a strong ASX dividend share:
1: Diversification
Owning Rural Funds shares isn't like owning one farm in one location. Its properties are spread across five sectors: cattle, cropping (cotton and sugar), vineyards, almonds and macadamias.
Not only are the farms diversified by farm type, but they are also spread across different states and different climactic conditions. So far, its farms are located in five different states.
The recent tough drought period has shown why being located in different conditions is important, though none of Rural Funds' farms were in the worst-hit areas. However, Rural Funds does own a significant number of water entitlements for tenants to use.
Rural Funds doesn't carry any of the operational risks of the farms, that's on the tenant.
The ASX dividend share recently announced that it was acquiring a 21,600 ML medium priority lower Fitzroy River water allocation for $32.4 million. The water will be sourced from the Rookwood Weir, which is being constructed 66km south-west of Rockhampton. This water will be applied to the development of up to 2,500 hectares of macadamia orchards and development of irrigation for cropping and cattle production.
2: Long rental contracts with quality tenants
One of the statistics to look at with REITs is the weighted average lease expiry (WALE).
That essentially means: how long does the average rental contract have left to run within the portfolio? The longer the WALE, the more income visibility and stability that the REIT has to offer.
According to Rural Funds, at 30 June 2020 (which was the end of FY20) its WALE was 10.9 years. Almonds, macadamias and cattle are the sectors with the longest leases. There are some almond farm leases that go to 2038.
3: Rental growth leading to distribution growth
Rural Funds is a particularly strong ASX dividend share because of the consistent distribution growth that it's able to achieve. Management aim to increase the distribution by 4% per annum.
It has successfully increased its distribution by 4% each year since it listed several years ago.
Rental increases are built into the rental contracts. At the end of FY20, 41% of the rental income was subject to fixed annual rental increases of 2.5% with market reviews. Another 4% of the rental income is subject to just a fixed 2.5% annual increase per annum.
Then the next 46% of rental income has CPI linked rental increases, with another 7% being linked to CPI inflation with market reviews. The final 2% is classified as 'other'.
The other key way that Rural Funds achieves distribution growth is through investing in productivity improvements. For example, for cattle properties it has improved farms with water points, pasture improvements and cultivation areas. For the cropping properties it has invested in water storage and irrigated cropping.
Current yield
At the current Rural Funds share price, it has a forward FY21 distribution yield of 4.6% based on distribution guidance of 11.28 cents per unit. Another 4% increase of the distribution in FY22 would mean a yield of 4.8%.
