Duxton Water Ltd (ASX: D2O) may be one of the best small cap ASX dividend shares in my opinion.
If you haven't heard of Duxton Water that's okay, it's a unique and small, but rapidly growing, company that purely owns water entitlements and leases them out to agricultural businesses.
The recent dry conditions in regional Australia has been a major boost for the value of Duxton Water's water entitlements, leading to a pleasing rise in its value and earning potential.
One of the good things about water entitlements is that water doesn't depreciate like a building does, although there are other risks. A wet year or government intervention could be negative.
In the 12 months to April 2019 the company generated a return of 27% (of its net asset value (NAV) plus franked dividends).
The build up of profit has allowed Duxton Water to steadily grow its dividend payment to shareholders. The latest dividend payment was a fully franked 2.6 cents per share in March, and the Duxton Water board is targeting a 2.7 cents per share payment in September and a 2.8 cents per share payment in March 2020.
The company had a post-tax net asset value (NAV) of $1.50 per share at the end of April 2019, but the pre-tax NAV was $1.64, so it's trading at a small discount to this figure. It's a fair price to pay.
Foolish takeaway
I really like Duxton Water as a defensive option and it's a way to indirectly benefit from the growth of the Australian agricultural sector. If there is heavy rainfall in one year then I would be looking to increase my holding of Duxton Water, but I'm not rushing to buy any more right now despite its forward grossed-up dividend yield of 5% looking quite attractive.
