In this article I'm going to explain why I prefer Duxton Water Ltd (ASX: D2O) as an ASX dividend pick compared to Wesfarmers Ltd (ASX: WES).
Duxton Water is a company that owns water entitlements, it's apparently the only listed business in the world that gives pure exposure to water credits.
I believe that, over the long-term, Duxton Water could provide dividends that are more defensive than Wesfarmers, but that the income could also grow faster too.
Duxton Water leases out its water entitlements to agricultural businesses to use. A majority of Duxton Water's water assets are high-security, which means it should get its allocation even in a dry period.
The Australian agricultural sector is steadily growing because of the increasing demand from a rising Australian population and global population. Over time this is likely to increase the value of water entitlements due to greater demand each year, subject to any particularly rainy years.
Farmers need water each year, so they will probably pay what necessary price for water and pass that cost on through food prices. It's useful for Duxton Water that it doesn't have to face a public friction point for rising costs.
In terms of dividends I think Duxton Water is showing all the signs of being an excellent long-term dividend share. In November 2017 it paid a partially franked dividend of 2.3 cents per share. In April 2018 it paid a partially franked dividend of 2.4 cents per share. In September 2018 it paid a partially franked dividend of 2.5 cents per share.
Yesterday, Duxton Water announced it would pay a fully franked dividend of 2.6 cents per share in March 2019. This represents an increase of 8.33% compared to a year ago. The company also guided that the dividend in September 2019 is likely to be 2.7 cents per share – an increase of 8% compared to the 2.5 cents per share dividend.
This steady, yet pretty strong, growth of the dividend is very attractive.
We will have to see how defensive the Wesfarmers dividend is over the next few years. We have already learned that Kmart and Target are facing difficult retail conditions. Will the falling house prices halt the growth of the all-important Bunnings? Will the growing presence of Amazon Australia cause Officeworks' margins to reduce?
Coles Group Limited (ASX: COL) wasn't exactly a fast-growth business for Wesfarmers, but it was the most defensive out of Wesfarmers' major businesses.
Duxton Water also announced that in FY18, ending 31 December 2018, it generated earnings per share (EPS) of 8.5 cents per share – growth of 165% compared to FY17. Based on the FY18 earnings, the Duxton Water dividend is well covered.
Foolish takeaway
Duxton Water is currently trading at a slight premium to the underlying value per share and may offer a grossed-up dividend yield of 4.1% for the 2019 calendar year. Of course, if there's a lot of rain in one year then the water values may go down temporarily.
I think it's always best to buy shares at a discount to their assets to give ourselves a bit of margin of safety, but Duxton Water could turn out to be a good long-term dividend share at the current price.
