The ASX dividend stalwart Rural Funds Group (ASX: RFF) can offer investors a solid amount of passive income.
I do own Rural Funds in my portfolio, and I'm hoping to buy more in the coming months because of how appealing it is and the bargain price it's trading at.
The business owns a diversified portfolio of farms, leasing them out across a number of subsectors including cattle, almonds, macadamias, vineyards and cropping.
Why does agricultural real estate appeal?
The ASX dividend stalwart is unique on the ASX in that it provides exposure to farms. Other real estate investment trusts (REITs) are focused on areas like industrial (warehouses), offices, shopping centres, storage units and others.
Diversification is a great tool for investors to lower/diversify risk, and gaining exposure to farms could be a good move.
The business has signed on a number of high-quality tenants which reliably pay their rent including Olam, The Rohatyn Group, JBS, Select Harvests Ltd (ASX: SHV), Stone Axe, Australian Agricultural Company Ltd (ASX: AAC) and Treasury Wine Estates Ltd (ASX: TWE).
Rural Funds also has these high-quality tenants signed on for a long period, which is typically longer than what other property subsectors may see. In the FY25 result, the business reported a long weighted average lease expiry (WALE) of 13.9 years (with leases predominately in a triple-net structure).
That's a lot of income security and visibility that's locked in for the REIT, giving investors exposure to a defensive property sector (being food production).
Why is the ASX dividend stalwart a good buy for passive income?
The business has structural rental growth, offering a mix of lease indexation mechanisms (rental growth) and market rent reviews. It benefits from inflation-linked increases and fixed annual increases.
This steady rental growth is helping undo the headwinds of high(er) interest rates and I believe will help drive the distribution higher in the coming years.
The ASX dividend stalwart is expecting to maintain its distribution per unit at 11.73 cents, which translates into a forward yield of approximately 6%. With the RBA interest rate noticeably lower than a year ago, I think that yield looks compelling.
I also believe the underlying value is very appealing, it had an adjusted net asset value (NAV) of $3.08 per unit. That means the current unit price is trading at a discount of close to 40%, which is very large in my opinion.
A combination of a good distribution yield and the potential of a closing of that NAV discount means the total returns could be positive.
