My ASX share portfolio is focused on investments that I believe can deliver passive income and grow my wealth. I'm going to tell you about one in my portfolio – Duxton Water Ltd (ASX: D2O).
Businesses that are growing their underlying value can provide investors with attractive returns, whether that's by growing the profit, cash flow or the asset value.
What does Duxton Water do?
One of the niche areas of the Australian asset markets is permanent water entitlements.
Australia has an advanced water trading system that enables farmers and other businesses to trade high-security and general water entitlements.
Most of Duxton Water's water entitlements are high-security water entitlements, which means Duxton Water should get those entitlements even if there isn't a lot of rain.
The ASX share aims to generate a return by offering irrigators a range of supply solutions including "long-term entitlement leases, forward allocation contracts and spot allocation supply."
How is the ASX share generating returns for shareholders?
By leasing out the water entitlements, the business is generating cash flow, which it is using to pay growing dividends to investors.
It has grown its dividend each year by 0.1 cents per share since 2017 when the half-year payment was 2.3 cents. It grew to 2.4 cents per share six months later, then 2.5 cents per share six months after that, and so on. The latest passive income payment was 3.4 cents per share in April 2023.
The ASX share has guided that there will be three more increases over the next three results and that the passive dividend income will reach 3.7 cents per share by the end of FY24.
Inflation of food prices can help support higher water entitlement prices. There is also a growing amount of high-value crops like almonds being planted that require more water than other types of crops, according to Duxton Water.
Duxton Water has seen its portfolio, in net asset value (NAV) terms, return an average of 13% to 31 December 2022 since it started several years ago. This long-term level of performance has been enough for the business to pay growing fully franked dividends and see the underlying NAV keep climbing over the years, driving the underlying value of the ASX share.
Can the ASX share keep performing?
At the end of April 2023, it had a post-tax NAV of $1.82, so the Duxton Water share price is at a 6% discount to this. The pre-tax value was $2.09, which is an 18% discount to the share price. That looks good to me. Trading at a discount can boost the passive income potential.
Management said that the weather outlook "continues to forecast drier than average conditions in the coming months, with the Bureau of Meteorology maintaining their forecast of a 50% chance of El Nino, and a high likelihood of a positive Indian Ocean Dipole forming later this year." Both of these "commonly cause below average rainfall for the eastern half of Australia."
The company thinks that there will be strong demand for allocations in the upcoming year, partly because there will likely be a large volume of annual crops planted next season.
I think that water values (and the passive income) can continue to climb in the long term as Australian and global demand for food increases with the population.
