The S&P/ASX 300 Index (ASX: XKO) share Rural Funds Group (ASX: RFF) is in my portfolio for the dividend income it provides
For readers who haven’t heard of this business before, it’s a real estate investment trust (REIT) that owns farmland across Australia.
The economy is feeling the effects of inflation and higher interest rates right now but below are three key reasons I own Rural Funds shares and why I’m planning to own the ASX 300 share for many years to come.
Diversification
I like the concept of owning commercial property but I don’t think office or retail buildings have a lot of growth ahead of them. This can be attributed to the ongoing impacts of working from home and the long-term growth in online shopping.
Certainly, there are plenty of ways to invest in industrial properties on the ASX but investing in farms is a unique opportunity.
Rural Funds Group is invested in a variety of farm types including cattle, vineyards, almonds, macadamias, and cropping (sugar and cotton).
These farms are in different states, providing geographical diversification and, also, different climactic zones.
Rental growth
Rural Funds obtains rental income in a variety of ways.
Some of its rental contracts have revenue linked to inflation, meaning this period of higher inflation is a boost to the business’s rental income.
A large portion of its remaining contracts have a fixed annual rental increase, with the occasional market review.
Essentially, the rental income keeps marching higher each year.
The ASX 300 dividend share is also benefiting from having long rental contracts, meaning it has revenue (and growth) locked in for a long time. In its FY23 half-year result, Rural Funds said its weighted average lease expiry (WALE) was 12.3 years.
Rural Funds is also benefiting from its investments in its farms. This is done to improve productivity in some and occasionally to convert farms to grow more useful crops so they can generate stronger rents.
Rent is one of the biggest drivers of the company’s profit and distribution growth, so seeing rental growth is reassuring and encouraging to me.
Distributions
Higher interest rates have challenged short-term rental profit. As well, company funds have been invested in converting some of its properties into a large macadamia farm.
However, management isn’t concerned and believes rental profit will grow in FY24. I believe this will be supportive for the ASX 300 share’s future distributions.
Its goal is to increase its total payout to investors each year by 4%. In FY23, it paid a grossed-up payout of 12.2 cents per share, which translates into a distribution yield of 6.3%.
In the long term, I think a bigger Australian (and global) population will mean more demand for food, ongoing inflation, more rental income, higher farm values, and stronger distributions.
