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Why Rural Funds is a retiree’s dream share

Tristan Harrison
Real Estate Investment Trust

I believe that Rural Funds Group (ASX: RFF) is a retiree’s dream of share for retirement.

Rural Funds is a real estate investment trust (REIT) which specialises in farmland. It’s a commercial property owner, it has a diversified farm portfolio of almonds, macadamias, cotton, vineyards and cattle.

Owning a farm may be on the bucket list of many retirees, but I think Rural Funds is a retiree’s dream as a dividend share for a number of financial reasons:

Dividend yield

The Reserve Bank of Australia (RBA) has pushed Australia’s interest rate below 1%. That’s no good for savers and retirees. Term deposits just aren’t producing enough income.

Rural Funds offers a much bigger distribution yield. We’re halfway through the 2020 financial year and it’s on track to pay a FY20 yield of 5.5% based on the current share price of $1.96. It’s quite likely that the first two payments of FY21 will be higher than what was declared by Rural Funds in the last six months.

Reliable dividend

People often think that shares are risky. Some shares are risky, but others offer excellent defensive income. Rural Funds receives rental income from the tenants that are leasing its farms. Many of those tenants are locked into contracts for many years. Indeed, the (WALE) average lease expires in 11 years.

Many of those tenants are some of the best, largest and highest-quality tenants in the region such as Select Harvests Limited (ASX: SHV), Olam, JBS and Treasury Wine Estates Ltd (ASX: TWE). They are extremely likely to be operating for many more years and will keep paying their rent.

A bonus is that Rural Funds only pays out about 80% of its cash rental profit each year. That means it has some wriggle room to pay the same distribution even if the rental profit were to fall by say 10%.

Dividend growth

A nice yield is good, a reliable distribution is good, but I want to see growth over the long-term. If there’s no growth it means we’re losing purchasing power to inflation. I’d actually like my standard of living slowly increase, so it would be nice to see the distribution grow faster than inflation.

Rural Funds’ leadership aims to grow the distribution by 4% a year, which is much faster than inflation. It has achieved this since it listed and started paying a distribution several years ago.

The growth is helped by various factors. Rural Funds’ rental contracts with tenants have annual rental increases built into them that are linked to either a 2.5% fixed increase or CPI inflation. Rural Funds invests the retained 20% of its rental profit into productivity improvements at the farms for further rental income. There are market reviews for some properties every few years which can also boost income. Plus, acquisitions can boost rental income.

Foolish takeaway

I think Rural Funds is one of the best dividend shares for retirees over the next decade. It offers good starting income with good growth potential and excellent reliability.

The post Why Rural Funds is a retiree’s dream share appeared first on Motley Fool Australia.

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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020