Should you buy this ASX REIT for its 6% dividend yield?

Apr 19,2024
Should you buy this ASX REIT for its 6% dividend yield?

When any ASX dividend share, or REIT, is offering a 6% dividend yield upfront, it's usually enough to make most investors sit up and pay attention. After all, that's a yield that's higher than some of the ASX banks right now, let alone what you can get from a term deposit.

That's exactly what one ASX real estate investment trust (REIT) has on the table today.

But does this yield make a REIT worth buying for dividend income? That's what we'll be discussing presently.

The ASX REIT in question is Rural Funds Group (ASX: RFF). Rural Funds, as the name implies, is one of the ASX's only agricultural REITs. It owns a portfolio of farmland spanning several different sectors. These include poultry farming, vineyards, cattle, macadamias and almonds.

And yes, Rural Runds indeed trades on a trailing dividend yield of 6.02% right now. This yield comes from the REIT's quarterly dividend distribution payments.

Over the past 12 months, Rural Funds has paid out four dividend distributions, each worth 2.93 cents per unit. That's an annual total of 11.72 cents per unit. As is the case with most REITs, these distributions didn't come with franking credits attached.

At the current Rural Funds unit price of $1.95, these payments give the ASX REIT a trailing yield of 6.02%.

But, as any good dividend investor knows, a trialling yield reflects the past, not what investors are going to receive going forward.

So should investors feel comfortable investing in this ASX REIT for future income? After all, many ASX dividend shares have seemingly offered yields above 6% in the past but turned out to be dividend traps.

Well, one ASX expert who thinks Rural Funds is indeed a compelling buy today is broker Bell Potter. As my Fool colleague recently covered, this ASX broker has just given Rural Funds a buy rating, alongside a share price target of $2.40.

That valuation is based on a projection that the current unit price undervalues this ASX REIT. Bell Potter argued that the "~30% discount to market NAV appears excessive when we consider the material improvement in counterparty profitability indicators in recent months".

In terms of dividends though, this expert reckons they are looking sustainable. Bell Potter is predicting that Rural Funds will continue to pay quarterly dividend distributions worth around 11.7 cents annually over both the 2025 and 2026 financial years.

If accurate, this would mean that today's trailing yield would also be the yield that investors can expect to receive going forward from this ASX REIT if they buy Rural Funds units today.

Of course, that is just a prediction. Anything could happen over the next couple of years, and Rural Funds might not be able to fund those kinds of dividends into the future. But this ASX expert certainly thinks it can, and is telling investors to buy accordingly.