3 reasons I'd buy this high-yield ASX dividend share

I like the income this stock is throwing off.

| More on:
An Australian farmer wearing a beaten-up akubra hat and work shirt leans on a fence with livestock in the background and a blue sky above.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

High-yield ASX dividend share Rural Funds Group (ASX: RFF) looks like an attractive opportunity at its current valuation, in my opinion.

Higher interest rates have heralded a painful period for real estate investment trusts (REITs). Investors have had to adjust how much they think commercial properties are worth when safer assets like bonds now offer much better returns. Plus, most REITs carry significant debt — and debt has become much more expensive.

Rural Funds Group owns a diversified portfolio of Australian agricultural assets in five core sectors. Its assets are predominantly leased to corporate agricultural operators.

With the Rural Funds share price down around 40% from the end of 2021, it seems much better value. Indeed, the new high-interest era has been priced into the Rural Funds share price, as you can see on the chart below.

That said, I really like this company and I'd be happy to buy more units of this REIT for (at least) three reasons.

Stronger yield

When a share price falls, it increases the dividend yield of an ASX share if the dividend payout in dollar amounts remains the same.

For example, if a company has a 5% dividend yield and the share price falls by 10%, the yield on offer becomes 5.5%.

As I've mentioned, the Rural Funds share price has sunk 40%, which has pushed up the distribution yield to 6.2%.

I like that as a starting yield. It's more than you can get from a savings account and I believe the REIT can keep growing its payout over the long term with rental income growth built into its contracts thanks to indexation.

These are mostly fixed annual increases, or linked to inflation. Plus, a lot of the ASX dividend share's debt has been hedged with an interest rate of 2.83% in FY24, 2.8% in FY25, and 2.71% in FY26, protecting it from higher rates.

Attractive valuation

At the end of FY23, the company said it had an adjusted net asset value (NAV) per unit of $2.93. The current Rural Funds share price is trading at a 36% discount to this value.

I'm not sure that Rural Funds would be able to get the book value for all of its farms if it were to sell them, but I do think this represents a large discount to their underlying value.

Rural Funds is producing real rental profit every year. In FY24, management projects the REIT to generate 11.2 cents per unit of adjusted funds from operations (AFFO).

This represents the company's net rental profit which will soon benefit from developments and productivity improvements.

Investments are getting closer to paying off

Every month, the REIT is closer to seeing its rental profits increase materially as investment developments are completed.

A key focus of the ASX dividend share is its macadamia developments in Queensland. Rural Funds has signed a 3,000-hectare, 40-year lease with investment group TRG which started in FY23.

Every year that Rural Funds invests more into its macadamia farms, it effectively increases its rental income. The forecast rental capital base for the macadamia developments was $139 million in FY23. It's expected to rise to $244 million in FY24, $277 million in FY25, and $309 million in FY26.

At the same time, the rental income from them was $8 million in FY23. That's forecast to rise to $16 million in FY24 and $21 million in FY25.

Rural Funds also points out that it's also active in other productivity developments. One example is on three cattle properties prior to their leasing. These have a combined asset value of $120.6 million.

I like that the company is investing steadily across its asset base to increase the rental potential and underlying value. This should help long-term returns, including bigger distributions.

Motley Fool contributor Tristan Harrison has positions in Rural Funds Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Rural Funds Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

A man closesly watch a clock, indicating a delay or timing issue on an ASX share price movement
Dividend Investing

25 ASX 200 shares with ex-dividend dates next week

There are 25 ASX 200 shares scheduled to go 'ex-div' next week.

Read more »

man doing stocktake at supermarket
Dividend Investing

Guess which ASX 200 stock is predicted to pay an 8% dividend yield in 2025

It could be rewarding to own this business.

Read more »

A woman has a thoughtful look on her face as she studies a fan of Australian 20 dollar bills she is holding on one hand while he rest her other hand on her chin in thought.
Dividend Investing

Want big income? Buy these high-yield ASX dividend shares

Analysts think these income options are in the buy zone right now.

Read more »

Middle age caucasian man smiling confident drinking coffee at home.
Dividend Investing

Analysts have put buy ratings on these ASX dividend stocks

Here's what they are saying about these dividend stocks following their results.

Read more »

An older couple driving in a convertible on a freeway.
Dividend Investing

1 ASX 200 dividend stock I'm buying for superior passive income in 2024

This ASX 200 dividend stock trades on a juicy yield and could see sizeable share price gains in 2024.

Read more »

An oil refinery worker stands in front of an oil rig with his arms crossed and a smile on his face as the Woodside share price climbs today
Dividend Investing

2 cheap ASX stocks that offer more than 8% dividend yields

Aussie investors have a huge range of excellent income stocks to choose from. Here's a couple trading at a decent…

Read more »

Miner holding cash which represents dividends.
Dividend Investing

Everything you need to know about the supersized Fortescue dividend

It’s boom time for Fortescue shareholders.

Read more »

A young woman holding her phone smiles broadly and looks excited, after receiving good news.
Dividend Investing

Analysts say these high-yield ASX dividend stocks are buys

Big yields are expected from these dividend stocks. But how big?

Read more »