At a time when numerous growth shares are trading on very high price-earnings (P/E) ratios, it could be a good time to invest in beaten-up ASX dividend shares on low valuations and elevated dividend yields.
I think there are some businesses which aren't being appreciated enough by income-focused investors considering interest rates in Australia could be reduced any month, with Australian inflation finally beginning to get back to a more normal level.
As safe assets like savings accounts and term deposits become less appealing, it could make some ASX dividend shares more appealing. That's why I like the below two stocks.
Rural Funds Group (ASX: RFF)
Rural Funds is a real estate investment trust (REIT) I already own and that I'm calling undervalued. It owns a few different farm types including almonds, macadamias, cattle, vineyards, and cropping.
High interest rates are particularly challenging for REITs because they typically have large balance sheets (of both debt and assets). The high interest rate has made debt more expensive and is putting pressure on property prices/share prices.
In the past year, the Rural Funds share price has fallen close to 20%. Since early January 2022, the Rural Funds share price has dropped 45%.
With the business committed to paying investors an annual distribution of 11.73 cents per share, it's currently paying a yield of 6.7%.
Rural Funds has contracted rental income growth with tenants, either with a fixed annual increase or the annual increase is linked to inflation. I think this will help push rental profits higher in the coming years, particularly if interest rates reduce. The ASX dividend share's rental profit per unit (AFFO) is projected to increase by 3.6% in FY25.
APA Group (ASX: APA)
APA is a large energy infrastructure company in Australia, which owns a network of gas pipelines that transports half of the country's gas usage. It also owns wind farms, solar farms, gas power generation, gas processing facilities, gas storage, and electricity transmission assets.
The APA share price has dropped heavily in recent times too. Over the past year, it has dropped 16% and is down 44% from August 2022.
The high debt isn't helping APA's profitability and it has reduced the attractiveness of the cash flow it's producing.
However, it's important to note that a large majority of APA's revenue is linked to inflation (so it has benefited in recent years) and the high cost of debt could start to reduce.
As an ASX dividend share, the business has grown its distribution every year for the past two decades, which I think is a great record. That's not guaranteed to continue of course, but the business is guiding more growth in FY25.
It's expecting to grow its distribution by 1.8% in FY25 to 57 cents per security. That's a forward distribution yield of 8.5%.
