Let Your Profits Flow With These Top 5 Water Stocks

Water is one of the basic necessities of human life. Life as we know it cannot exist without water. For this simple reason, water may be the most valuable commodity on Earth, notes by Nikolaos Sismanis, contributing editor at Sure Dividend and a participating advisor at

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Water could be one of the biggest investing themes over the next several decades. An increasing global population is only going to cause demand for water to rise in the future.

And, given the fact that water is a necessity of human life, demand for water should hold up extremely well, even during the worst recessions. Therefore, investors with a longer time horizon should consider water stocks.

These factors make water stocks appealing for risk-averse investors looking for stability from their stock investments. In addition, all the water stocks on this list pay dividends and are likely to increase their dividends for many years in the future.

There are many different companies that can give investors exposure to the water business, such as water utilities. Some other companies are engaged in water purification. Here are the 5 best water stocks.

Essential Utilities
, Inc.

Essential Utilities — with a dividend yield of 2.2% — is the second-largest publicly traded water utility in the U.S., serving approximately 5 million customers across 10 states. The company has raised its dividend for 29 consecutive years.

The company has paid a quarterly dividend for 77 consecutive years. In 2020, which was a year that proved itself to be a challenging one to numerous industries and businesses, Essential Utilities was one of the few that was mostly unaffected from the adverse shocks of COVID-19, with total water usage was up 0.8% YoY.

The company has compounded its adjusted earnings-per-share at a CAGR (compound annual growth rate) of 7.4% over the last decade.

We expect the company to keep expanding its bottom line annually at around 7%, on average. Growth will be powered by its recent major acquisition of Peoples, organic growth, and regulated annual rate hikes.

To highlight the company’s focus on growth, Essential Utilities has closed nearly 200 acquisitions and ventures in the last 10 years, buying its smaller competitors and integrating them into its vast network.

Amid a very healthy payout ratio of around 60%, we also expect the company to keep growing its dividend annually at around 7%, similar to its current 5-year average.

The York Water Company
(YORW) is a company with two unique characteristics. Firstly, The York Water Company is the oldest investor-owned water utility in the United States, having functioned continuously since 1816.

Secondly, and more impressively, the company features one of the most impressive dividend histories ever recorded. The York Water showcases a spectacular record of over 200 years of uninterrupted dividend payments to shareholders, including 24 years of consecutive dividend annual increases as of today.

Due to the company’s very mature operations and predictable business model, York Water has seen a very steady and gradual growth in its EPS, which features a 10-year CAGR of 6.7%.

Future growth catalysts include a growing number of customers and distribution facilities, as well as acquisitions of wastewater systems.

For context, during 2020, customers grew by 1.8% to 72,681 (population served of more than 202,000). Consequently, we expect the company’s excellent dividend-per-share growth record to continue at an annualized rate of around 4% over the next five years.

This would be in-line with its latest increase and also in-line with the current trend of an improving payout ratio (currently 59%).

The company’s cash flows are unlikely to be affected by any potential recession, as was the case during the Great Recession and the COVID-19 pandemic.

The company operates within an exclusive franchised territory that is substantially free from direct competition with other public utilities, municipalities, and other entities, adding another layer of safety to its business model.

With a dividend yield of 1.5%, California Water Service
(CWT) is the 4th-largest publicly-owned water utility in the United States. The company has six subsidiaries that provide water to about 2 million people, mainly in California, with some additional operations in Washington, New Mexico, and Hawaii.

California Water Service has increased its dividend for more than 50 consecutive years, which makes the company a Dividend King.

California Water Service reported its first-quarter earnings results on April 28th. Quarterly revenues were $147.7 million, 17.6% versus the comparable period last year. Revenue growth came from rate increases that were negotiated throughout the last year and that were justified by higher water costs for the company.

The company’s past and estimated regulated rate base increases can be seen in the graph below:

Over the past decade, California Water Service has grown its earnings-per-share at an average annual rate of 4%, which is a decent pace of earnings growth for a utility. We believe that California Water Service’s earnings-per-share will continue to grow at a mid-single digits rate going forward, as it did in the past.

Earnings growth, in the long run, should be achievable thanks to the rate hikes that are regularly approved by relevant authorities/regulators, as well as organic growth such as population growth and increased water consumption.

California Water Service has paid out between 50% and 70% of its net profits throughout most of the last decade. Overall, the dividend payout ratio has declined slightly over that time frame, as the company’s dividend growth rate was lower than its earnings-per-share growth rate.

The predictable nature of the company’s earnings, combined with a payout ratio that is not overly high, means that the dividend looks very safe. Its 54-year record of annual dividend increases is certainly a testament to that.

Yielding 1.5%, American States Water (AWR) is a utility company with two business units: Utilities (primarily water, some electricity) and Services (wastewater services on several US military bases).

American States Water is based in California, where it operates its utility business. The company’s services unit spans several US states. American States Water is also a Dividend King, having raised its dividend for 66 consecutive years.

The company reported its first-quarter earnings results on May 3rd, 2021. Fully diluted earnings-per-share increased from $0.38 in Q1 2020 to $0.52 in Q1 2021, while revenue for the first quarter grew by 7.3% to $117.06 million year-over-year. Consolidated adjusted diluted earnings per share increased by 20.9% per share, compared to last year’s quarter.

Between 2011 and 2020, American States Water grew its earnings-per-share at a rate of 7.6% annually. The company managed to increase its profitability even during the last financial crisis, which shows that American States Water’s profitability is not cyclical.

We expect the company to retain its robust performance regardless of the state of the economy. Therefore, it should be able to maintain and extend its prolonged dividend growth, which features a 10-year CAGR of around 9.4%.

American States Water’s utility revenues will most likely continue to grow at a slow pace, as regulators will allow the company to increase its rates over time in order to encourage spending on growth and maintenance projects. The company is building out its services business by getting contracts for wastewater services on additional US military bases.

The contracts for wastewater services on US military bases span a 50-year period each, so getting one such contract provides for a decades-long and very safe revenue stream.

The company has increased its dividend every year for 66 years in a row, which can only be described as a very long and successful dividend growth track record.

Closing the list of our top water stocks is the 1.4% yielding American Water Works
(AWK). While the company may not feature the prolonged dividend growth records that its peers discussed earlier, American Water is the largest and most geographically diverse, publicly traded water and wastewater utility company in the United States, as measured by both operating revenues and population served.

The company provides drinking water, wastewater, and other related services to over 15 million people in 46 states. Its regulated business includes 53,000 miles of pipe, 609 water treatment plants, 150 wastewater facilities, 110 wells, and 75 dams.

American Water Works has a highly stable and robust track record both in terms of its profitability and its dividend payments.

The company enjoys an extremely resilient business model due to water being a necessity both for residential and industrial usage, as well as a mission-critical asset for the military. As a result, American Water has been able to grow its network and operations with limited risks.

Instead of predicting the company’s future earnings growth, management has already shared its outlook, expecting to grow EPS by approximately 7%-10% annually over the next few years, powered by 5%-7% from regulated investment capex, 1.5%-2.5% from regulated acquisitions, and ~1% market-based businesses. EPS growth includes rate base increases which the company estimates to grow by a CAGR of 7%-8% going forward.

Consequently, we expect solid dividend increases moving forward at around 9% annually, easily supported by the company’s underlying profitability.

American Water Works currently features a healthy payout ratio at around 57%. Due to its vastly diversified operations and predictable future cash flows, it should continue growing its earnings and dividend income for its investors for decades to come.

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