It is very satisfying when one of your largest positions also creates one of your best returns. That's what happened with a defensive small cap I bought around a year and a half ago called Duxton Water Ltd (ASX: D2O).
A return of 50% is not my best result, but the underlying performance of the defensive business has been strong and the market has sent its share price upwards accordingly.
Duxton Water is the only company with pure-exposure to water entitlements on the ASX.
Around 18 months ago I bought shares for $1 each and now the share price is $1.51 due to a sharp rise in the value of water entitlements, with a further 9.8 cents of dividends declared. Not bad!
Why have water entitlements done so well? I'm sure you would have seen that rain has been patchy at best for the south east of Australia. A drought in regional areas is driving up the importance and value of water.
Duxton Water aims to generate annual income from the leasing of water entitlements and also benefit from capital growth of the value of the water over time. At 28 February 2019, Duxton Water had over 66,108 ML of water entitlements across 20 different water asset types and classes.
Dry conditions have continued throughout the summer and that has seen more focus on entitlement ownership and long-term water credit leases. Those conditions has seen high security water prices increase and general water prices slightly decrease.
For me, one of the most attractive things about owning Duxton Water shares is that the business is steadily growing its dividend. In November 2017 it declared a 2.3 cent per share dividend, in April 2018 it paid a 2.4 cents per share dividend, in September 2018 it paid a 2.5 cents per share dividend and this month it is going to pay a 2.6 cents per share dividend.
Duxton Water has also flagged its intention to pay a fully franked 2.7 cents per share dividend in September 2019. Steadily growing the dividend is a great way to reward shareholders in a cyclical industry.
Foolish takeaway
Duxton Water is currently trading at around its post-tax NTA. The drought would probably need to get quite a lot worse for the next 18 months to be as good as the last 18 months. I think Duxton still looks like a decent dividend share with a grossed-up dividend yield of 5% for 2019.
