ASX dividend stocks have the potential to offer dividend yields much larger than the interest we can get from a bank savings account.
When share prices fall, the dividend yield goes up, assuming the dividend payment in dollar terms doesn't change. A company isn't worth investing in solely for its distribution, but it can play an important role in the overall returns, particularly if the yield is high.
Let's look at two ASX dividend stocks that offer compelling yields and seem heavily discounted to me. If I'm right, they could deliver a mixture of capital returns and income in the next year or two.
Rural Funds Group (ASX: RFF)
This real estate investment trust (REIT) owns a portfolio of farm properties in several agricultural sectors, including cattle, vineyards, almonds, macadamias, and cropping.
The business has suffered during this period of higher interest rates, which has been a headwind for both rental profit and valuation. The Rural Funds share price has fallen 44% since January 2022, pushing up its distribution yield significantly.
Rural Funds grew its distribution each year between 2014 to 2022 and has maintained its cash distribution at 11.73 cents per security since then. That distribution translates into a current distribution yield of 6.6%.
I'm not relying on the RBA cutting interest rates this year, but that would certainly help the REIT's rental earnings in the longer term. It's expecting to grow its rental profit per security, called adjusted funds from operations (AFFO), by 3.6% to 11.4 cents in FY25.
I like how the ASX dividend stock can grow its rental income in multiple ways. There are two key ways it can do this – contracted rental increases (largely fixed or linked to inflation) and investments in farms to make them more productive or increase the rental potential (such as investing in more water access or changing the food type produced on that farm).
APA Group (ASX: APA)
This ASX dividend stock has an impressive record of continuous passive income growth. It has grown its distribution every year for the past 20 years. Only one business has a longer dividend growth streak on the ASX.
What does APA do? It has a large gas pipeline across Australia, transporting half of the country's usage. This provides the company with significant cash flow, with a large majority of the revenue linked to inflation (providing steady increases). The business also has other assets related to gas (such as processing), electricity transmission and renewable energy generation.
The business remains an important part of Australia's energy mix, and it continues to invest in new pipelines that can unlock further earnings and cash flow. For example, it recently announced that it would develop the Sturt Plateau Pipeline, a $66.5 million, 37km pipeline in the Northern Territory, to connect the Shenandoah South pilot project to the Amadeus gas pipeline.
The ASX dividend stock expects to pay a distribution of 57 cents per security in FY25, which represents a 1.8% increase year over year. That payout translates into a forward distribution yield of 8.1%.
