The ASX dividend stock Duxton Water Ltd (ASX: D2O) is one of the most underrated businesses for passive income, in my view. I think it's a strong choice, with it currently down 16% from its peak in 2023, as the chart below shows.
Duxton Water is not exactly a big business, it has a market capitalisation of around $230 million, according to the ASX.
As the name suggests, it's involved in water. Its objective is to make returns from a portfolio of permanent water entitlements and use this to provide flexible water supply solutions to its Australian farmers.
It generates returns by offering irrigators a range of supply solutions, including long-term entitlement leases, forward allocation contracts and spot allocation supply. In other words, farmers can utilise short-term and long-term supply. Duxton Water can also benefit from the increase in the value of water entitlements too.
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Appealing ASX dividend stock
Dividend growth and stability are two of the main factors that are compelling to me.
Impressively, the business has grown its dividend every six months since November 2017. There are not many businesses that have a dividend record like that on the ASX. In-fact, I'd say there are very few.
Of course, dividend growth is not guaranteed, but I think Duxton Water is capable of continuing that run.
At the current Duxton Water share price, the ASX dividend stock offers a grossed-up dividend yield of just over 7%, including franking credits.
Why I think this is a good time to invest
Duxton Water said in its July update that major water storages across the water system remain "at their lowest levels for this time of year since 2020."
Those reduced dam storages have resulted in the lowest opening allocations to NSW general security entitlements since 1 July 2020.
The ASX dividend stock also noted that several small parcels of lower Murray entitlements were also acquired at attractive prices during the month.
I'm expecting water demand to increase in the coming years with crops like almonds requiring more water than others, which could increase the value of water entitlements, along with inflation over time.
The business is trading at an attractive value, in my view. Every month, it tells investors what its underlying value is, which takes into account the value of the water entitlements, any debt and so on.
In July 2025, it had a post-tax net asset value (NAV) of $1.66 and a pre-tax NAV of $1.86, implying share price discounts of 11% and 20%, respectively. I think this is a very appealing discount.
Other ASX shares may be capable of even stronger returns.
