The interest rate has soared in Australia and the US. This has opened up a wide range of opportunities, from technology to property businesses. And at some point, I think there's going to be a bull market rebound. Thus, there's a high-yield ASX stock I've got my eyes on.
Why does the interest rate changing make such a difference? Legendary investor Warren Buffett once explained:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
But, I don't think that interest rates are going to stay this high forever. Central banks are trying to crush interest rates. Inflation won't always be at multi-decade highs. I think in a few years interest rates will eventually come back down to around 3% and perhaps slightly below. It depends on what central banks think a 'neutral' rate is.
In my opinion, I think there are a few high-yield ASX stocks that could see investor support when interest rates start returning to that neutral rate.
Rural Funds Group (ASX: RFF)
I think the real estate investment trust (REIT) faces an interesting time ahead as commercial property values come under scrutiny. However, a number of names have already seen heavy share price falls, even if the values on the balance sheet haven't been cut (yet). At this stage, I wouldn't rely on the stated net tangible assets (NTA) regarding the valuation of for example, an office building in a REIT.
But, I think farmland valuations may be more resilient considering the global population is still growing and food prices have soared, making it easier for agricultural businesses to afford the higher rent.
That's one of the main reasons why I like Rural Funds – its rental contracts have growth built in, with some having a link to CPI inflation, others having a fixed 2.5% annual increase, and some contracts having the occasional market review. This is one of the main elements for the REIT's ongoing distribution growth to investors.
But, there are other pleasing reasons to consider this high-yield ASX stock.
- The yield is a factor of course. The forecast total distribution by Rural Funds for FY23 equates to a yield of 6.1%. Rural Funds aims to grow its distribution by 4% per annum. A 4% increase in FY24, while not guaranteed, would translate into a distribution yield of 6.3%.
- I think the decline of the Rural Funds share price has more than made up for the negative of higher interest rates. Since 7 January 2022, the Rural Funds share price is down 37%. I believe that provides a good margin of safety.
- Rural Funds offers a lot of diversification. It has multiple farm types – almonds, macadamias, vineyards, cattle, cotton and sugar.
- The high-yield ASX stock is investing heavily in its properties to improve its value and usefulness, which will hopefully boost rental income. For example, it's investing in (improved) irrigation at some locations. Rural Funds is also converting some properties to a 'higher and better use', including a large macadamia development, with another 2,000 hectares to be completed by FY25. More developments will commence in FY25.
Foolish takeaway on this high-yield ASX stock
While Rural Funds may not see its share price at a rapid rate from here, I think there's potential for a recovery when interest rates fall. Until then, investors can get a very pleasing, and typically growing, distribution from this business.
