Rural Funds operates as a real estate investment trust (REIT) that owns farmland and agricultural assets across Australia.
There are a few different reasons why I’m planning to keep holding Rural Funds in my portfolio for many years to come. Let’s take a look.
Rather than just a single property in one location, Rural Funds owns a diverse portfolio of farms.
The ASX dividend share owns properties across agricultural sectors including cattle, vineyards, almonds, macadamias and cropping (sugar and cotton).
I think it is useful for Rural Funds to own different types of farmland for diversification purposes. For example, if the REIT’s portfolio were limited to just cattle farms, the investment ‘universe’ would be smaller. Diversification also allows management to look at a wider array of potential opportunities.
Rural Funds’ properties are also spread over different climatic conditions. In times of variable weather, this can lower short-term and longer-term risks. In addition, Rural Funds owns substantial water entitlements for its tenants to use.
Speaking of tenants, the REIT’s tenant base is mostly comprised of large, stable businesses. Some of the largest ones include Select Harvests Limited (ASX: SHV), Treasury Wine Estates Ltd (ASX: TWE), Olam International and JBS.
For me, one of the main attractions of Rural Funds as an ASX dividend share is its goal to increase its distribution by 4% per annum.
I’m looking for businesses that hopefully provide income security even during times of economic uncertainty. Rural Funds stuck to its 4% distribution growth goal even during the COVID-19 year of 2020.
In FY22, it’s expecting to grow its annual distribution by 4% to 11.73 cents per unit. It has increased its distribution every year since it listed several years ago.
Contracted rental growth
One of the main ways that Rural Funds can achieve this distribution growth is through contracted rental indexation.
Rural Funds notes that 44% of its lease income is based on CPI inflation, which is currently running at an elevated rate. Most of the rest of the contracted income sees fixed annual increases, with occasional market reviews.
The ASX dividend share also invests in productivity improvements at its farms, which aims to increase the value of the farm for tenants (and Rural Funds), and aims to lead to further rental growth.
One of the final things that I like about Rural Funds is that it has a pretty good dividend yield. At the current Rural Funds share price, it has an FY22 distribution yield of 4%.
At the moment, its adjusted net asset value (NAV) per unit is $2.24. That’s the underlying value of the business. Currently, the Rural Funds share price is at a 30% premium to its NAV.