Income investors flock to the utility sector, and for good reason. Utility stocks are defensive, recession-resistant companies that generate steady profits and return the majority of their earnings to investors as dividends.
Within the utility sector, water utilities are a rapidly-growing industry. Similar to the electric utilities, many water utilities are regulated, which allows them to pass along regular rate increases to customers on an annual basis. This keeps earnings growing from year to year.
Thanks to their consistency and strong dividends, water utility stocks have outperformed the market in the past year. For these reasons, income investors should consider water utility stocks such as American Water Works (NYSE: AWK), Aqua America (NYSE: WTR) and American States Water (NYSE: AWR).
Thirsty for Growth and Income?
The investment case for water utility stocks is fairly straightforward: water is a basic need and is vital for human life. That makes water an extremely stable business. And, future growth is possible, since demand for water should only grow from here as global populations expand.
Over the past year, publicly traded water utility stocks have been great investments. American Water has returned 32% in the past 12 months, not including dividends. Meanwhile, Aqua America and American States are up 17% and 3%, respectively, in the past year. All three have outperformed the S&P 500 index in that time.
Founded in 1886, American Water is the largest publicly traded water utility company. It services approximately 15 million people spread across 47 states and Ontario.
American Water benefits most from its regulated business, which constitutes approximately 83% of its annual revenue. For the full-year 2015, profit from continuing operations in the regulated segment rose 9% from the a year earlier. This was slightly better performance than its market-based business, which grew 7%.
Overall, American Water realized growth from its capital investment program, as well as lower operational and maintenance expenses. For 2015, earnings per share increased 12% year-over-year.
Aqua America added more than 17,000 customers through organic growth and acquisition last year. The company grew revenue and earnings per share by 4% and 5%, respectively. Moving forward, the company expects another good year in store in 2016. At the midpoint of its forecast, management expects 5% earnings growth this year.
American States provides water service to approximately 260,000 customers located in Northern, Coastal and Southern California. Its earnings grew 2% last year, thanks to favorable rate adjustments.
Steady Streams of Dividends
Not only are water utility share prices gaining, but shareholders are also receiving solid dividend payments as well.
On April 22, American Water raised its dividend 10%. Its annualized dividend rate moves up to $1.50 per share. American Water has increased its dividend every year since its 2008 initial public offering. This year’s raise is the fourth in a row of double-digit increases to the dividend. The stock currently yields 2.1%.
American States has provided investors with more than 300 consecutive quarterly dividend payments without interruption, and it has increased its payout for an amazing 61 years in a row. American States Water’s current annualized dividend of $0.90 per share represents a 2.1% yield.
Aqua America has paid uninterrupted quarterly cash dividends for 71 years, and it has raised its dividend 25 times in the last 24 years. At its current stock price the dividend provides a 2.2% yield.
Good to the Last Drop
In a world of scarce resources, there is perhaps no resource more vital to human life than water. Since water is a basic need, companies that engage in water distribution are about as safe a business model as one can find.
The water utility industry is a subsector, and water utility stocks often fly under the radar of the much bigger electric utilities. But water utilities have all the qualities investors look for from utility stocks: specifically, steady profits and secure dividends.
As a result, investors interested in a reliable stock with a rock-solid business model should consider publicly traded water utilities like American Water Works, Aqua America and American States Water.
Organize Your Dividends With One Step
Do you know when your next dividend stock pays out? Do you know when the dividend stock you want to buy more of pays out – and how much? We’ve put together a simple calendar that highlights many of the market’s best dividends into one easy to scan document. Read it once, and you’ll see how to set up a 12-month dividend stream to ensure income all year long.