Why I think this ASX 300 stock is a fantastic pick for dividend income

I'm using this stock to boost my passive income.

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The S&P/ASX 300 Index (ASX: XKO) stock Rural Funds Group (ASX: RFF) is one of my top picks for dividend income within the index.

I like to own businesses that I believe have enough earnings stability to deliver passive income, even during difficult times for the economy.

The COVID-19 period was a perfect example that not all blue-chip dividends are safe, with cuts from stocks like ASX bank shares and Transurban Group (ASX: TCL).

Rural Funds is a real estate investment trust (REIT) that owns different farm types including almonds, macadamias, cattle, vineyards and cropping.

There are a few key reasons why I'd buy Rural Funds shares (again) for dividend income.

Good rental growth for this ASX 300 stock

The business has long rental contracts, which can provide stability and long-term rental growth through a mix of rental indexation mechanisms.

Over half of the rental income is linked to CPI inflation, so this period of elevated inflation has been supportive for rental income growth. Another 33% of the rental income has fixed rental income (with market reviews). These two areas of rental income growth can help drive the underlying value and rental profits of the ASX 300 stock.

Rural Funds is also working on macadamia orchard developments, with a 40-year lease commenced in January 2024. Development of 3,000 hectares is forecast to be materially complete in 2024. Rent is earned on the value of land, water and capital expenditure as it's deployed – $173 million was deployed by the end of the first half of FY24, with an increase forecast to $298 million by FY25.

Solid distribution yield

A good, higher-yield ASX dividend share needs to have a solid distribution yield in my books. Ideally, it's better than what someone could get from a savings account.

The ASX 300 stock is expecting to pay a distribution per unit of 11.73 cents, which currently translates into a distribution yield of 5.8%.

The business still intends to target distribution growth of 4% per annum, as well as generating capital growth.

Discount to NAV

A REIT investor can only know what the true net asset value (NAV) is if they try to sell the assets.

Rural Funds regularly gets independent valuers to work out what the asset values are. The business said its adjusted NAV – which includes water entitlements at market value rather than at cost – was $3.07 at 31 December 2023. The Rural Funds share price is at a 35% discount to this NAV.

The Rural Funds share price has dropped over 30% from its peak in early 2022. I think it's a good time to buy shares at around $2.

Motley Fool contributor Tristan Harrison has positions in Rural Funds Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Transurban Group. 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.

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