I think that Rural Funds Group (ASX: RFF) could be one of the best dividend shares on the ASX.
Rural Funds is a real estate investment trust (REIT) farmland landlord, I think it could be a quality income idea to own for at least three reasons:
Diverse assets
Rural Funds owns farmland property across a number of different states, climactic conditions and farm types. At the last count Rural funds had 49 properties across the agricultural sectors of cattle, vineyards, poultry, cotton, macadamias and almonds.
The more that Rural Funds diversifies its holdings the lower risk it will be to negative long-term weather changes and other factors, although the tenant actually carries the operational risk.
Long-term investments and tenants
Over the centuries farmland has continued to grow in value and has remained ecomincally useful. I expect farmland will continue to be a decent investment for the rest of our lives. Indeed, I think farmland is superior to most other forms of property because buildings like offices and shopping centres age and need costly refurbishments every so often.
Rural Funds' farms are leased to high-quality listed tenants like Select Harvests Limited (ASX: SHV) and Treasury Wine Estates Ltd (ASX: TWE), as well as subsidiaries of businesses listed on other stock exchanges.
Rural Funds had a weighted average lease expiry (WALE) of 11.4 years at December 2018.
Rental income growth
Rural Funds has rental indexation increases built into all of its contracts with its tenants, the increases are linked to either inflation or a fixed 2.5% annual increase.
It's this built-in rental increase that allows management to confidently predict that the annual distribution can grow by 4% per annum for the foreseeable future.
Foolish takeaway
Rural Funds has a projected FY20 distribution yield of just under 5%, which I think is pretty good in this environment. Rural Funds may have one of the most defensive dividends on the ASX because its income increases are pretty much locked-in already. However, the main downside at the moment is that it's trading at a sizeable premium to its underlying assets.
