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Rural Funds Group (ASX:RFF) is an ASX dividend stock that, in my opinion, deserves attention from investors. It's a stock I recently purchased myself and intend to hold indefinitely.
As a farmland real estate investment trust (REIT), Rural Funds Group stands out on the ASX. While there are numerous operating agriculture companies, their profit and performance can often be volatile. Rural Funds Group (ASX: RFF) offers a higher level of stability because its underlying earnings are derived from consistent rental income rather than variable commodity-linked revenue.
Why it's a buy now Every business has an underlying balance sheet value, typically measured using the net asset value (NAV) metric, which is the net total of assets minus liabilities. Rural Funds Group regularly discloses its adjusted NAV, which includes the market value of its water entitlements.
As of December 31, 2023, Rural Funds Group reported an adjusted NAV of $3.07 per unit, marking a 5% increase from June 30, 2023, primarily due to asset revaluations.
At the current share price, Rural Funds Group is trading at a discount of approximately 33% to its December 2023 NAV. This discount appears compelling.
It's challenging to determine the exact value of the company's farms without a sales process, but another way to assess it is by looking at the distribution yield. Rural Funds Group currently pays an annual distribution of 11.73 cents per unit, translating to a distribution yield of 5.8%. This represents a solid starting point for passive income.
Why I'd hold Rural Funds shares forever Farmland has been a valuable asset for centuries, if not millennia. I believe it will remain a valuable asset for the foreseeable future, making me comfortable with the idea of owning Rural Funds shares for the long term.
The business has rental growth built into its contracts, with some linked to CPI inflation and others featuring a fixed annual increase. This can drive rental income higher over time, offsetting the higher cost of debt and potentially leading to larger distributions in the future.
Furthermore, the growing Australian and global population should bolster food demand, thereby increasing the underlying value of Rural Funds Group's farms.
In summary, Rural Funds Group presents an attractive investment opportunity due to its stable rental income, discounted share price relative to NAV, and potential for long-term growth driven by increasing food demand.
