The ASX share BWP Group (ASX: BWP) looks like a compelling idea for investors wanting a reliable business with a strong dividend yield. As a bonus, I'm optimistic about what capital gains the business can achieve in the coming years.
This business is a real estate investment trust (REIT). It is best known for owning properties that are leased to Bunnings Warehouse, the biggest profit generator in the Wesfarmers Ltd (ASX: WES) business.
At a time when the Reserve Bank of Australia (RBA) official cash rate is coming down, this looks like a prime to invest. Let's take a look at three of the elements that appeal to me most about BWP right now.
Solid dividend yield
One of the benefits of investing in REITs is that they can provide investors with a good distribution yield. Commercial properties usually have a higher gross yield than residential properties.
The last two distributions from the ASX share come to a total of 18.47 cents per security. At the current BWP Trust share price, that translates into a dividend yield of 5.1%.
That yield is right at the top of the range of what savers can get from a banking product. The payout is able to grow in the future, whereas savings account rates are fixed (and may fall in the coming months).
This REIT is able to pay out most of its rental profits each year and still deliver long-term growth for investors. This is because rental growth is built into its rental agreements with Bunnings.
Rental profit growth
I think the ASX share has a number of impressive rental statistics that support its solid dividend yield.
At 31 December 2024, BWP Trust's property portfolio was 98.7% leased, with a weighted average lease expiry (WALE) term of 4.4 years.
The rent payable for each leased property is increased annually, either by a fixed percentage or by CPI inflation, except when a property is due for a market rent review.
BWP reported that rental growth of 3.4% per year was recorded for 74 of its leases, which were subject to annual fixed or CPI increases. The CPI increases came to 3.9% and the fixed annual increases came to 3%.
In the HY25 result, BWP reported net profit excluding fair value (property value changes) was up 15% to $66.1 million and this helped it increase its distribution by 2% per unit.
RBA rate cuts to help its valuation
As the RBA cuts rates – with more expected – the business could benefit in three different ways, in my view. Firstly, It could reduce the interest cost of debt (boosting rental profits). Secondly, it could increase the value of the properties. And thirdly, it could help close the discount between the BWP Trust unit (share) price and the underlying value of the business.
At the current BWP Trust share price, it's trading at an 8% discount to its net tangible asset (NTA) per unit. While that's not the biggest discount in the sector, I think the ASX share is very appealing considering we're in a period of rate cuts.
I believe there is great potential for the business to outperform the S&P/ASX 200 Index (ASX: XJO) in the medium-term.
