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This ASX small cap could be a future dividend champion

I think Duxton Water Ltd (ASX: D2O) is building a solid reputation as an ASX dividend share and it could be a future dividend champion.

Duxton Water is a company that owns water entitlements and leases them out to agricultural businesses for them to use.

Duxton Water pays a biannual dividend and has just announced its interim dividend.

Following on from guidance reaffirmed to the market on 1 April 2019, Duxton Water has announced that it will pay an interim dividend to shareholders of 2.7 cents per share. The dividend will be fully franked.

Duxton Water has been steadily increasing its dividend every six months since 2017 when it paid a 2.3 cents per share dividend.

It has also provided guidance of a 2.8 cents per share dividend to be paid in March 2020, which would be another impressive increase.

I like that the company is steadily increasing the amount of its water portfolio that is leased (compared to unleased), as irrigators shift their focus from the spot market to securing longer-term water supply.

Duxton Water is steadily growing its water portfolio with further purchases of water entitlements, giving the company and shareholders more firepower for future dividends.

The dry conditions have really been helping push up water values over the past year. A wet year may well push down the value of the water rights, but over the longer-term we could see water rights go up in value as higher value crops take up more of the demand – such as almonds.

Either way, I think Duxton Water is a very interesting idea as a way to diversify a portfolio for a stream of dividends.

Foolish takeaway

Duxton Water has a forward grossed-up dividend yield of 5.6%. In this era of low interest rates I think this is a solid yield and it’s one to consider. It’s currently trading at a 10% discount to its post-tax NTA, which I think is a pleasing starting position.

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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.