Water stocks and ETFs can get the profits flowing.
The American West is gripped by severe drought — yet again. According to recent reports, about 90% of California is in “extreme or exceptional” drought conditions, and the federal government recently declared the first-ever official water shortage in the Colorado River Basin after years of persistent challenges. If you live or work in the area, there are real implications to your daily life. But regardless of where you live, events in this region present a unique opportunity for investing in the long-term trend of for-profit water companies serving this need.
Invesco Global Water ETF (ticker: PHO)
This $1.7 billion Invesco water exchange-traded fund is the largest and (pardon the pun) most liquid option out there for investors looking to play this corner of the stock market. The fund is comprised of just under 40 stocks, with its top holdings the $220 billion Danaher Corp. (DHR), which provides diagnostic and purification technologies, and the $60 billion water treatment and sanitization firm Ecolab Inc. (ECL). This is definitely a fund focused on a short list of components, as these two stocks make up more than 16% of the portfolio. But some of that focus is unavoidable when you’re looking at a smaller corner of the market like water stocks.
First Trust Water ETF (FIW)
FIW is a $1 billion exchange-traded fund, also holding about 40 stocks with exposure to water and wastewater infrastructure businesses. That includes companies like water testing and diagnostics firm IDEXX Laboratories Inc. (IDXX). Despite the relatively small portfolio of companies, no single pick represents more than about 4% of the entire ETF’s holdings, allowing for a bit more diversification than the prior Invesco fund.
Invesco S&P Global Water Index ETF (CGW)
With a focus more on actual water infrastructure companies instead of testing and the like, CGW is another option, with about $1 billion in assets. For instance, its top position is American Water Works Co. Inc. (AWK), a $31 billion for-profit water utility that serves some 1,700 communities nationwide. AWK represents more than 10% of the portfolio all by itself and the top three positions equal about 25% of total assets for this water ETF. When you have that much riding on a short list of stocks, then it sometimes makes sense to just look at individual investments by themselves.
American Water Works Co. Inc. (AWK)
AWK is the largest and most popular individual water stock out there, roughly twice as large as the next-biggest publicly traded water utility on Wall Street as measured by its $32 billion market capitalization and its $4 billion in annual revenue. Furthermore, its business is reasonably diversified given the large number of markets it serves, with some 15 million customers and almost 55,000 miles of pipes. The kicker is that like many utilities, AWK is a reliable dividend payer, with a 60.25-cent dividend per share each quarter that adds up to a decent 1.4% yield, better than the payout on the typical S&P 500 stock.
York Water Co. (YORW)
Much smaller at just $580 million in market value, York Water is in some ways a more direct play in that it isn’t spread out over a vast geographic area. Instead, it is laser-focused on providing drinking water, wastewater management and related services to a few dozen municipalities in York and Adams counties in southern Pennsylvania. This pick is admittedly smaller than some of the others on the list, but its entrenched status where it dominates this area makes it difficult to disrupt and very likely to benefit from long-term demand in water use.
California Water Service Group (CWT)
California Water Service is another regional water utility worth a look, serving some 500,000 customer connections, mostly in California and New Mexico. The $3 billion company isn’t exactly bursting at the seams, but it’s generating reliable single-digit earnings and revenue growth year after year and has grown to tally more than $800 million in annual revenue. Its dividend is also decent at 1.6% in annual yield, slightly better than the typical large-cap U.S. dividend stock at present.
Evoqua Water Technologies Corp. (AQUA)
Evoqua provides water and wastewater treatment systems for industrial, commercial and municipal water treatment markets. While not a utility itself, AQUA serves various water infrastructure players worldwide through its filtration and treatment systems. This manufacturer is highly specialized, but its $1.5 billion in annual revenue and nearly $5 billion market capitalization shows that this is a well-established company with deep customer relationships. If you aren’t particularly interested in researching regional for-profit water utilities, this key supplier is another good way to tap into the trend of water investing.
Water stocks and ETFs to buy:
— Invesco Global Water ETF (PHO)
— First Trust Water ETF (FIW)
— Invesco S&P Global Water Index ETF (CGW)
— American Water Works Co. Inc. (AWK)
— York Water Co. (YORW)
— California Water Service Group (CWT)
— Evoqua Water Technologies Corp. (AQUA)
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Update 09/29/21: This story was published at an earlier date and has been updated with new information.