Rural Funds Group (ASX: RFF) is a really good ASX dividend share and could be a great option for income investors to consider.
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What is Rural Funds?
Rural Funds is a real estate investment trust (REIT) which owns farmland across Australia. It is quite diversified with different farm types including almonds, macadamias, vineyards, cattle and cropping (sugar and cotton).
Why is it such a good ASX dividend share?
1: Yield
The most important thing for an ASX dividend share is the dividends, or distributions in Rural Funds' case.
Rural Funds pays its distribution from the cash net rental profit each year. This measure is called the adjusted funds from operations (AFFO).
In FY21 it's expecting to generate 11.7 cents of AFFO per unit and to pay a distribution of 11.28 for the financial year.
Then, in FY22, the ASX dividend share is expecting to pay a distribution of 11.73 cents per unit, which translates to a forward distribution yield of 5%.
It's not a big starting yield, but it can be combined with growth.
2: Regular distribution growth
Rural Funds has an annual growth target for its distribution of 4%, which is comfortably more than inflation right now.
The business achieves this growth through a mixture of ways. The growth is achieved with rental indexation built into the contracts, productivity improvements and conversion of assets to higher and better use.
Rural Funds sees some of its rental indexation growth come from a fixed 2.5% annual increase, with the rest linked to CPI inflation, plus market reviews.
The ASX dividend share has a plan to develop 5,000 ha of macadamias, which is a higher and better use – this will help grow the AFFO in the coming years.
It also has a long weighted average lease expiry (WALE) of 11.1 years.
3: Diversification
It has good diversification. Its properties are spread across different farm types, geographic locations and climactic conditions.
A key to the stable performance of Rural Funds is that it has high-quality tenants which are large and have strong market positions.
It has tenants like JBS, Australian Agricultural Company Ltd (ASX: AAC), Stone Axe, Treasury Wine Estates Ltd (ASX: TWE), Olam, Select Harvests Limited (ASX: SHV) and Queensland Cotton.
Rural Funds share price valuation
In the FY21 half-year result, the ASX dividend share's adjusted net asset value (NAV) increased by 4% to $2.01 up from FY20.
That means the Rural Funds share price is valued at a 16% premium to the adjusted NAV.
