One of my favourite S&P/ASX 300 Index (ASX: XKO) stocks right now for passive income is Rural Funds Group (ASX: RFF), a real estate investment trust (REIT) that owns farmland in multiple states and climatic conditions across Australia.
The business is one I've liked to regularly highlight this year because of how cheaply it is priced compared to its former highs. While the Rural Funds share price is down by 43% since its peak a few years ago, as the chart below shows, the income has been remarkably consistent.
I'm going to start by highlighting the attractiveness of Rural Funds' distribution yield and then demonstrate why the investment is appealing for more than just its short-term passive income potential.
Rural Funds distribution yield
The business has paid a distribution per unit of 11.73 cents since 2022 and it's planning to pay another 11.73 cents per unit in FY26.
Assuming the ASX 300 stock does pay that guided passive income payout in the new financial year, it is on course to deliver a distribution yield of 6.4%, which I think is attractive compared to what savings accounts and term deposits are currently paying.
The current payout is one thing, but I'm optimistic the distribution can grow in future years because of two factors.
Passive distribution income growth
The business grew its distribution every year between 2014 and 2022, but it has been maintained since then.
However, one of the main negatives for the business is elevated interest rates because that means paying more interest to lenders, hurting rental profits. But, the RBA has already cut the interest rate twice in 2025 to date and there could be more cuts during FY26. This could be a strong tailwind for earnings, in my view.
Additionally, the ASX 300 stock has contracted rental increases across most of its farms, with those increases linked to inflation, or they have fixed annual increases. This is helping steadily push up the rent at each farm.
If inflation were to stay higher than expected in Australia over the long-term, while the RBA cash rate cuts may be slowed, it would mean more rental growth for the farming landlord and help the passive income, in my view.
Big valuation discount
Rural Funds is currently trading at a large discount to what its stated underlying value is.
The adjusted net asset value (NAV) is a financial measure that tells investors what its balance sheet is (supposed to be) worth at market value. That includes the farms, the water entitlements, cash, the loans and so on.
It's challenging to know exactly what the farms are worth unless Rural Funds decided to sell them all. But, it does have the farms regularly valued.
At 31 December 2024, the business had an adjusted NAV of $3.10. That means, at the current unit price, the ASX 300 stock is trading at a huge 41% discount. If the RBA cuts the cash rate further, I think that discount could materially reduce in the medium-term.
