Duxton Water Ltd (ASX:D2O) could be a great alternative asset choice

Duxton Water Ltd (ASX:D2O) is a very interesting investment idea.

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There are several asset classes that most people consider between. Bonds, property, businesses, gold and cash are the usual suspects.

I think water could be considered one of the main water-related alternative investments. Australia has one of the world's most advanced water trading systems, allowing agricultural businesses and investors to trade with each other.

Duxton Water Ltd (ASX: D2O) is supposedly the only pure listed water entitlement business in the world.

It's looking to build a portfolio of water entitlements focused on the Southern Murray Darling Basin. This region has a large amount of Australia's high value permanent horticulture. It's a water-hungry region.

At the end of September 2018, Duxton Water held over 52,500 ML of entitlements, valued at nearly $150 million. That's a lot of water!

In its September 2018 update Duxton Water said that its net asset value (NAV) increased by 1.4% to $1.36.

Since inception in September 2016 Duxton Water has delivered a total return of 35.9% when you add the NAV growth and dividends paid together.

According to Duxton Water, the Murray-Darling Basin Authority has increased its draw on the Dartmouth storage, which acts as the Murray's reserve storage and is rarely utilised. Only in the water years of 2004, 2007 and 2016 has this occurred.

The high levels of early irrigation mean there's less water allocation held for peak summer demand, which could benefit Duxton Water thanks to its high level of high security entitlements.

However, there will be rainy years sometimes, which would send the valuation of water down. However, I like that it should be generally unrelated to capital market cycles.

Foolish takeaway

Duxton Water is currently trading at its underlying value of $1.36, with a partially franked dividend yield of 3.6%.

It's better to buy things when they're trading at a discount to their underlying value, but I think Duxton Water shares could be a good way to diversify your portfolio at the current value.

Motley Fool contributor Tristan Harrison owns shares of DUXTON FPO. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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