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Here's the Best Way for City Slickers to Invest in Farmland

By Lou Whiteman - Feb 5, 2021 at 11:00AM

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How to buy into farming without actually buying a farm.

Farmland is valuable, as the saying goes, because they aren't making any more land. 

But it's also hard for a nonfarmer to go buy farmland. 

In this video from Motley Fool Liverecorded on Jan. 28, Industry Focus host Nick Sciple and Motley Fool contributor Lou Whiteman talk about a stock that allows individual investors to get exposure to farmland without the full cost of buying property. It could be a great choice, especially for investors who are seeking to generate steady income from their portfolio. 

Nick Sciple: Another company I wanted to talk about today, Lou, was Gladstone Land (LAND -5.66%). We mentioned them briefly last week on the podcast with Matt DiLallo, the ticker is LAND. Pretty easy to follow. What can you tell us about that Gladstone Land?

Lou Whiteman: This is a farming REIT. They own farmland in I believe about 13 states, they pay monthly dividends. The yield right now is about 3.3% annually, and it has been increasing. This is a business, it's a pretty straightforward business. They buy the land, they lease it back to farmers. The interesting thing here is it gives you exposure to the farms without making a bet on an actual farm with a pretty standard but yet pretty attractive setup with the way they set up their leases.

Sciple: They mostly used triple-net leases, that's just kind of a finance term. But just to explain that in common sense terms for you, it means the person who's leasing the property treats it like they're the owner. So, they pay the taxes on it. They pay the licensing or whatever. They pay the maintenance, all those sorts of things. From the perspective of the REIT, Gladstone Land, they lease out the property. They collect their rent payments, and they are not responsible for any of those other kinds of expenses that go into maintaining the property, that's distinguishable from another type of lease where the person who owns the property, the lesser, would be the one paying those sorts of expenses.

They also have some of their leases are participating, where they get some income from the farm, but primarily they're doing these triple-net leases. Another thing that is interesting when you look at their focus, they talk about they're focused more on two primary areas, which is annual fresh produce and permanent crops. What's that? Annual fresh produce is stuff like fruits and vegetables, tomatoes, things like that, stuff that you plant and harvest every year. Then permanent crops are things like blueberries, nuts, things like that, that you plant and then you'll have like a 10-year life once you have that orchard or what have you up and running. They're focusing on these areas to the detriment of things like wheat and corn and those sorts of grains that are more commodity products. What they say is, for those fresh produce, you get both higher rents and lower risk than those commodity crops. They're focusing on areas where they think there's a little bit lower risk for themselves, and they can generate higher income by having that focus. Interesting opportunity to invest in farmland here in the U.S..

Whiteman: Yeah. I think one thing interesting in comparing it to other REITs, as a REIT investor, a lot of REITs are tied to the economic cycle, whether it's industrial REITs, definitely retail. We saw that in 2020. Even some of the apartment REITS. As we said, the farm could be very cyclical, but it tends to be tied to a cycle other than the economic cycle. It may fall with it, but it may be an opportunity to keep yield coming in when other sectors are in trouble, which, as far as REIT diversification, I think makes it an interesting thing to think about.

Sciple: Yeah. Especially for someone looking for income, you want something that's non-correlated. Then also, they're paying dividends on a monthly basis. If you're running the stock like this so you can get regular dividend income coming in to support yourself for retirement or what have you, this is the type of company that it's unlikely you are going to experience volatility that's in line with what goes on in the stock market. Obviously, demand for farmland doesn't fluctuate in the same way that maybe the stock market does on a year-over-year basis, and they're paying you dividends on a monthly basis. So you can get this kind of steady income coming in. If you're someone who is an income investor, I think this is something you could put on your radar as something that can give you a steady, dependable income in a way that you can sleep at night relatively comfortably.

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