Is this the best small cap ASX dividend share?

Is Duxton Water Ltd (ASX:D2O) the best small cap ASX dividend share?

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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.

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Motley Fool contributor Tristan Harrison owns shares of DUXTON FPO. The Motley Fool Australia has recommended DUXTON FPO. 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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