I think this is a good time to invest in Australian dividend shares as plenty of companies look cheap amid the struggles that some households and businesses are facing.
Higher interest rates and elevated inflation have hurt the financial position of some Australians to spend how they usually would. High rates have also led to some real estate investment trust (REIT) businesses being discounted compared to their underlying asset value.
When share prices are pushed down, they boost the dividend yield on offer. For example, if a business with a 5% dividend yield suffers a 10% share price drop, the dividend yield becomes 5.5%. If the share price dropped 20%, the yield on offer would be 6%.
I believe the above effect, with a higher yield and lower valuation, has played out with the two Australian dividend shares below, making them very attractive to me.
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Collins Foods Ltd (ASX: CKF)
Collins Foods is a significant franchisee operator of KFCs across Australia and Europe. It also has a small but growing Taco Bell network in Australia.
The Collins Foods share price is down 31% since early January, which has significantly boosted the dividend yield. In the FY24 result, it paid an annual dividend per share of 28 cents, which translates into a trailing grossed-up (with franking credits) dividend yield of 4.7%.
The Australian dividend share has grown its annual dividend every year since 2014, which is one of the longer growth streaks on the ASX.
While the current operating environment is tricky, with household financial pressures, I think the company has a good growth outlook. It's growing its KFC network in Australia and Europe, adding revenue and scale benefits. And future RBA rate cuts could help boost demand.
UBS predicts that in FY29, Collins Foods could generate earnings per share (EPS) of 93 cents and pay an annual dividend per share of 57 cents. That prediction translates into a future grossed-up dividend yield of 9.5%.
Rural Funds Group (ASX: RFF)
Rural Funds is a REIT that owns a portfolio of farms across the country. There are various farm types in the portfolio including almonds, macadamias, cattle, cropping and vineyards.
Farmland has been a useful asset for centuries, and I think that will continue for a long time to come.
Turning to valuation, the Rural Funds share price has declined by almost 40% since January 2022. The Australian dividend share currently pays an annual distribution per unit of 11.73 cents, which translates into a distribution yield of 6% at this lower price.
The business continues to grow its revenue through these difficult times. It has in-built rental growth, with some contracts having fixed annual rental increases and others being inflation-linked rental increases, plus market reviews.
I believe the Rural Funds share price could benefit when the RBA eventually cuts rates, which could lead to some investors seeking income-paying investments like this REIT.
