The ASX dividend share Rural Funds Group (ASX: RFF) looks like a very appealing business to consider right now. I strongly believe in the S&P/ASX 300 Index (ASX: XKO) share, which is why I'm a unitholder in the real estate investment trust (REIT).
Rural Funds is best known as a farmland landlord, owning a variety of different farm types, including cattle, almonds, vineyards, macadamias, and cropping. That's good diversification, in my view.
It's not exactly a high-growth tech business, but for several different reasons, I believe it could deliver market-beating returns at the current valuation.
Good distribution yield
A significant portion of the returns generated by the ASX dividend share is being paid to investors as cash payments each year.
The distribution yield isn't huge, but the business hasn't cut its distribution since it started paying out to investors over a decade ago.
Rural Funds is expecting to pay a distribution of 11.73 cents per unit in FY26, which currently translates into a forward distribution yield of 6.5%. This yield could appeal to income-seekers if interest rates fall.
Big discount
Each REIT has an underlying net asset value (NAV). That figure tells investors what the 'real' value is per unit of the ASX dividend share, which includes the (independently valued) properties, the debt, and other items.
A large discount between a REIT's unit price and the NAV can suggest that the business is being undervalued by the market. A reduction in that discount can lead to pleasing capital growth.
At 31 December 2024, Rural Funds had an underlying NAV of $3.10. That means the current unit price is trading at a 42% discount to that NAV. That's a big discount. If the RBA cuts rates further, I think that could help reduce the NAV discount and help push up the NAV.
Ongoing rental growth
The ASX dividend share has rental indexation built into most of its contracts with tenants, with those increases either fixed annual rises or linked to inflation. That's a useful organic boost to its rental income each year, as well as rental review mechanisms. This is helping support farm values and can help boost the size of the distribution in the coming years.
Rural Funds is expected to grow its adjusted funds from operations (AFFO), the net rental profit, by 3.6% to 11.4 cents in FY25. This is a good sign, and I think that now the RBA has seemingly finished raising rates, its AFFO can grow in the coming years (particularly if rates are noticeably reduced in the next couple of years) as the cost of debt reduces.
