I plan to hold onto this quality ASX dividend stock forever. Here’s why.
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There are many ASX dividend stocks available to income investors. I plan to hold Rural Funds Group (ASX: RFF) forever because of the revenue it can generate.
Rural Funds operates as a Real Estate Investment Trust (REIT) which owns farmland and agricultural assets throughout Australia.
There are various reasons why I plan to keep rural funds in my portfolio for many years to come. We’ll take a look.
Rather than one property in one location, Rural Funds has a diverse portfolio of farms.
ASX Dividend Share owns properties in all agricultural sectors, including livestock, vineyards, almonds, macadamias and crops (sugar and cotton).
I think it is useful for Rural Funds to own different types of agricultural land for diversification purposes. For example, if the REIT’s portfolio was limited to beef farms, the investment “universe” would be smaller. Diversification also allows management to examine a wider range of potential opportunities.
The properties of rural funds are also distributed in different climatic conditions. In times of variable weather conditions, this can reduce short-term and long-term risks. In addition, rural funds have substantial water rights that its tenants can use.
Speaking of tenants, the REIT’s tenant base is mostly made up of large, stable businesses. Some of the biggest include Some limited harvests (ASX: SHV), Cash Wine Estates Ltd (ASX: TWE), Olam International and JBS.
For me, one of the main attractions of rural funds as an ASX dividend stock is its aim to increase its distribution by 4% per year.
While 4% per year isn’t exactly higher, it’s generally faster growth than inflation and can get worse over time.
I look for businesses that I hope provide income security even in times of economic uncertainty. The rural funds have remained true to their distribution growth target of 4%, even during the COVID-19 year of 2020.
In FY22, it plans to increase its annual distribution by 4% to 11.73 cents per share. It has increased its distribution every year since its listing several years ago.
Rental growth contracted
Contractual indexation of rents is one of the main means by which rural funds can achieve this growth in distribution.
Rural Funds notes that 44% of its rental income is based on CPI inflation, which is currently taking place at a high rate. Most of the rest of the contracted revenue sees fixed annual increases, with occasional market reviews.
The ASX Dividend Share also invests in improving the productivity of its farms, which aims to increase the value of the farm for tenants (and rural funds) and aims to drive further rental growth.
One of the last things I like about rural funds is that they offer a pretty good dividend yield. At the current Rural Funds share price, it has a FY22 payout yield of 4%.
Currently, its adjusted net asset value (NAV) per unit is $2.24. It is the underlying value of the company. Currently, the Rural Funds’ share price is at a premium of 30% to its net asset value.