Utility stocks are appropriate for nearly every portfolio. It’s a simple matter of supply and demand. The demand for resources such as electricity and oil continues to grow. But supply is finite. That creates an ideal setup for investors.
And perhaps the most vital resource of them all is water. This article will give investors an overview of water stocks. The topics covered include why water is such a vital resource, why investors should be interested in water stocks. We’ll also look at some of the best water stocks to buy from a historical perspective. And for fund investors, we’ll provide a list of some of the best funds that provide exposure to water stocks.
A Vitally Important Resource
Water is an indispensable resource. Every day gallons of water are used for drinking, cooking, or cleaning. More specifically, according to Dripfina, the average American household uses approximately 300 gallons of water each day. That number may seem unbelievable until you consider that every toilet flush uses 1.5 gallons of water.
This water usage is reflected in the price of water. In the United States the average monthly water bill is over $70. And water bills can range from as low as $18 to as high as $91.
However, those statistics only consider domestic use. Water is also used in a variety of commercial applications including industrial, thermoelectric power, irrigation, and mining. In fact, agricultural irrigation accounts for nearly 70% of fresh water consumption. And the energy sector is the second largest consumer of water. Water is also a critical resource for data centers. According to some estimates, the typical data center uses between three and five million gallons of water every day.
Factored altogether, the total market size of the global water market as of 2021 is estimated to be $500 billion with $100 billion of that coming from the United States.
Water Scarcity is a Real and Growing Concern
Nine countries hold 60% of the world’s total fresh surface water resources. Not surprisingly these include several of the world’s largest countries, the United States, China, and India.
By contrast, in certain parts of the world, and even in the United States, water is becoming an increasingly scarce resource. A United Nations study on Water Scarcity cited the fact that 2.3 billion people live in “water-stressed” countries. This means that they use up greater than 25% of their fresh water resources every year.
In fact, water scarcity may be the reason over 700 million people are displaced by 2030. And the World Bank estimates that countries that face water scarcity may face a total loss of 6% in their gross domestic product (GDP).
Why Invest in Water Stocks
So far, we’ve focused on the supply/demand dynamic. Simply put, water is becoming increasingly scarce and that makes it an ideal choice for investors who want to add commodities as part of a diverse portfolio. However, there are other reasons for investors to consider water stocks including:
Need for Water Treatment
Although 70% of the earth’s surface is covered in water, approximately 97% of that water comes in the form of saltwater. And only about 1% of the world’s water is immediately available for human consumption. That fact highlights the need for water to be treated to ensure it is safe for everyday applications. Water purification is a detailed, regulated process and there are several companies that compete in this space. That opens up another avenue for investors to think about water stocks.
A related area that is growing in popularity is water monitoring. Spending on digital water hardware, software, and services that check for water quality is growing at a rate of approximately 7% per year.
An Infrastructure That Needs to be Upgraded
Just like the electrical grid, the world’s water infrastructure will need to be upgraded. This is one of the largest investments that utilities and other water-related companies need to make. Pumps, valves, tanks and other equipment need to be upgraded. According to the research firm Canaccord Genuity, this maintenance will grow at a rate of about 10% a year. In fact, $111 of the 2021 Infrastructure Bill is earmarked for upgrading the United States water infrastructure.
Demand for Bottled Water
Another consideration for investing in water stocks is the growth in demand for bottled water. That demand is increasingly coming from international markets. In 2018, the United Nations issued a study that noted that 177 countries rely on desalination for at a portion of their freshwater consumption. And demand in the United States continues to grow as well. Between 2010 and 2020, Americans bottled water consumption increased by 61% on a per-capita basis. That calculates out to each American drinking approximately 45 gallons of bottled water every year.
Bolster the Defensive Part of a Portfolio
Like every utility, water is a highly regulated industry. One consequence of this for investors is that many utilities don’t have the pricing power that can lead to strong capital growth. However, one benefit to regulation is that it protects the existing companies that create barriers to entry. To that end, there is a consolidation going on in the industry which is resulting in a handful of large conglomerates. That means that many of the best water stocks offer predictable cash flow and dividends that can help improve an investor’s total return.
What Are Some of the Best Water Stocks?
There are many ways to invest in the business of water including futures contracts and investing in index funds. But the most common is for investors to buy equities in water-related companies. Here are five U.S. water stocks that have a proven track record of growth. You’ll notice that these companies also service key geographic regions, which is a key consideration when choosing any utility stock.
American Water Works Company (NYSE: AWK) is a water utility company that has several subsidiary companies. These companies provide water and wastewater services to approximately 3.4 million customers spread throughout 1,700 communities in 14 states inside the United States.
Like most water utilities, American Water Works delivers a steady stream of predictable revenue. Nevertheless, AWK stock price has increased by over 100% in the last five years as of June 2022. The utility has plans to grow its customer base and make infrastructure improvements as just two ways it plans to achieve even more capital growth. Plus, like many utilities, the company has a solid track record of paying and increasing the amount of its dividend.
Middlesex Water Company (NASDAQ: MSEX) primarily services the New Jersey and Delaware markets. The company operates in both regulated and non-regulated markets. The regulated business collects, treats, and distributes water on retail and wholesale basis to residential, commercial, industrial, and fire protection customers. Middlesex Water also provides regulated wastewater systems in New Jersey and Delaware.
MSEX stock is up 121% in the last five years and the analyst community believes the stock has an 18% upside. In addition, the company has been increasing its dividend in each of its last 18 years.
California Water Service Group (NYSE: CWT) – Due to its large population and the size of its economy, California is a prized area for utility companies. And that’s a key part of the bullish story behind California Water Service Group. The company services approximately 494,500 customers in 100 California communities. It also operates in Hawaii as well as in New Mexico and the Pacific Northwest.
CWT stock is up 45% in the last five years and analysts give the stock an upside of 15%. Plus, California Water Service Group is part of the exclusive Dividend Kings club meaning that it has increased its dividend for at least 50 consecutive years. In this case, the company has increased its dividend for 56 years.
Global Water Resources (NYSE: GWRS) is based in Phoenix, Arizona. The waste resource management company owns, operates, and manages regulated water, wastewater, and recycled water utilities. As of December 2020 the company services approximately 74,000 customers.
Global Water Resources has only been trading publicly since 2016. However, GWRS stock is up 119% as of June 2022. Analysts give the stock a 49% upside and the company has increased its dividend for the last four years and currently has a dividend yield of over 2%.
Essential Utilities (NYSE: WTRG) – This water utility serves water and utility customers under the Aqua and Peoples brands. The company services over 7.5 million customers in a range of states including Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West Virginia, and Kentucky.
WTRG stock is up 40% in the last five years and analysts give the stock an upside of 11%. Shareholders also benefit from the company’s dividend which it has increased for the last 31 years.
What Are the Best Mutual Funds/ETFs That Include Water Stocks?
Many investors feel more comfortable having all or just a portion of their portfolio invested in mutual funds or exchange-traded funds (ETFs). And so it won’t surprise you that there are a number of funds that give investors diversified exposure to a basket of water stocks.
The largest of these ETFs is the Invesco Water Resource Portfolio ETF (NASDAQ: PHO). This fund invests exclusively in U.S.-based businesses and diversifies among mid-and small-cap companies. Another option is the iShares U.S. Utilities ETF (NYSEARCA: IDU) which gives investors exposure to water-related stocks along with other utilities.
Some Final Thoughts on Water Stocks
Water stocks are a good way to give your portfolio some defensive protection. That’s because demand for water is only going to increase. And that means many of these companies generate consistent cash flow and pay regular dividends.
Investing in water-related businesses can be a boring business. But it’s also big business and it’s likely to become more profitable in coming years. This will largely be due to the fact that water is becoming a scarce resource. But it will also be due to ongoing infrastructure upgrades as well as the emergence of new technology that is helping to improve water quality.
Investors have many ways to invest in water-related businesses and between individual equities and mutual funds/ETFs, there are solutions for investors of all risk levels.
Before you consider American Water Works, you'll want to hear this.
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