The ASX small-cap stock Duxton Water Ltd (ASX: D2O) could be one of the most appealing investments in the current economic environment, in my view.
It provides investors with exposure to water entitlement rights in Australia. Duxton Water provides water to farmers with a range of offerings including long-term entitlement leases, forward allocation contracts and spot allocation supply.
As at March 2025, it had a water portfolio value of $290 million and a post-tax net asset value (NAV) of $1.71 per share following the sale of $121.3 million of water entitlements to the Australian government.
There are at least three good reasons to like this ASX small-cap stock right now, in my opinion.
Valuation discount
The latest NAV declaration means the current Duxton Water share price is trading at a discount of more than 16% to its underlying value. The pre-tax NAV is even higher, at $1.87, though I'm paying closer attention to the after-tax value.
Duxton Water said the sale proceeds from the government transaction are expected to be used to settle recent entitlement acquisitions, as well as to reduce the ASX small cap stock's debt levels.
Defensive earnings
Agriculture can be quite a cyclical industry, so farming businesses can be volatile over the years. But, water rights could be an appealing way to indirectly play that sector while also finding stability in a world rocked by a growing trade war between the US and various countries.
Duxton Water generates reasonably consistent lease income from its water rights portfolio, which would be appealing at this time.
Improving outlook
The ASX small-cap stock recently gave an update that weather conditions have remained dry in some areas of South Australia and Victoria. Despite some rainfall in NSW, there have been "no significant changes in the water storage levels in southern basin dams, which are still at their lowest for this time of year since 2021."
According to the company, water prices remain "firm across key catchments due to ongoing dry conditions and below-average storage levels".
Duxton Water said the demand for leases, forward contracts and carry-over space is reportedly increasing.
I think the above commentary bodes well for the company in the foreseeable future.
Passive dividend income
The ASX small-cap stock has been steadily growing its dividend for investors every six months since December 2017.
It's expects to pay a dividend per share of 3.71 cents in a few months. Added to the last paid dividend, the current grossed-up dividend yield is 7.4%, including franking credits.
Considering the defensive earnings and growing payout, I think the expected payout makes Duxton Water an appealing option.
