Water is a resource that is essential for the human body. We cannot live without water, and our need for it has spurred a multibillion-dollar industry.
Unlike market trends and unicorn companies, which can come and go, the world will always need utility companies that manage water and firms that develop new water technologies and infrastructure.
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Utility companies have more resilience during recessions than most firms, and many of these companies also offer dividends. It’s common to see companies with double-digit profit margins in the industry, but which water stocks and exchange-traded funds, or ETFs, should investors consider? Here are some stock selections to start with:
| Water stock | Dividend yield |
| American Water Works Co. Inc. (ticker: AWK) | 1.9% |
| Essential Utilities Inc. (WTRG) | 2.9% |
| Global Water Resources Inc. (GWRS) | 2.4% |
| Xylem Inc. (XYL) | 1.2% |
American Water Works Co. Inc. (AWK)
This water utility company has been around since 1886 and provides water to 14 million people in 24 states. The company has a $28 billion market cap and a dividend yield hovering near 2%. The company has raised its dividend each year since 2008, including an 8% hike from an annualized $2.62 dividend per share in 2022 to an annualized $2.83 dividend per share in 2023.
The company targets a 7% to 9% compound annual dividend growth rate over the long run. American Water Works has exceeded this benchmark over the past five years, posting compound annual dividend growth of nearly 9.7% during that time. The company aims to deliver these results while maintaining a 55% to 60% dividend payout ratio.
American Water Works has been busy acquiring more assets, such as Towamencin Municipal Authority’s wastewater system in Pennsylvania and a wastewater treatment plant from Granite City, Illinois. The company purchased these assets for $104 million and $83 million, respectively. Susan Hardwick, president and CEO of American Water Works, mentioned these investments in the Q1 2023 earnings call.
“Our investments in infrastructure and our success signing new purchase agreements for regulated acquisitions has set the stage well for achieving our expected growth in 2023 and beyond,” she said.
The sentiment implies shareholders can expect more of the same: growing earnings and annual dividend hikes.
Essential Utilities Inc. (WTRG)
Essential Utilities is a water, wastewater and natural gas provider that serves 5 million people across 10 states. The company has a $10.5 billion market cap and a dividend yield approaching 3%. The annual dividend jumped from $1.07 in 2022 to $1.15, representing a 7% increase.
Essential Utilities CEO Christopher Franklin remains confident that the company can achieve previous EPS guidance despite rising interest rates and inflation. Franklin made comments about the company’s Q1 2023 results demonstrating the company’s resilience and ability to keep expenses down.
“Despite the inflationary headwinds, our heightened focus reduced overall operating and maintenance expenses in the first quarter.” So far this year, shares are down 14.7% as of June 27, but analysts believe the stock is due for a rebound.
Wells Fargo maintained its “strong buy” rating for the water utility company with a $50 price target. This analyst recommendation came on May 10, implying a 24.5% upside from its June 27 closing price.
Global Water Resources Inc. (GWRS)
Global Water Resources is a microcap stock with a market cap of about $305 million and a dividend yield sitting at 2.4%. Unlike most utility companies, Global Water Resources has a monthly dividend that it raises every December. The annualized dividend is currently about 30 cents per share.
Global Water Resources prioritizes areas surrounding Phoenix and recently acquired a water utility with approximately 3,300 connections in Pima County, Arizona.
This recent acquisition is the largest one since the water utility company went public on the Nasdaq in 2016. Global Water Resources grew its top-line and bottom-line numbers in Q1 2023 and invested $6.5 million in infrastructure projects to maintain and grow its utilities.
Ron Fleming, the CEO of Global Water Resources, mentioned a slowdown in new housing because of higher interest rates. However, he remains confident in the company’s growth due to Arizona’s population boom. He made these remarks during the earnings call for Q1 2023 results:
“We anticipate further service connection growth due to the region’s continued rapid population and job growth, which is expected to drive continued expansion in multifamily housing and large-scale commercial, recreational and industrial projects.”
Investors who are bullish on water utilities and Arizona’s growth may want to give Global Water Resources a closer look.
Xylem Inc. (XYL)
Xylem is a water technology company taking innovative approaches to solving critical water and infrastructure challenges. The company boasts a $26.6 billion market cap and serves residents in approximately 150 countries. The company’s dividend yield is a little above 1%, which makes its yield lower than the other water utility companies discussed so far.
However, the company recently bumped its dividend up by 10%, taking it from an annualized $1.20 per share to $1.32 per share.
The company recently completed its acquisition of water treatment company Evoqua Water Technologies Corp. (AQUA) for $7.5 billion via an all-stock transaction. Before the acquisition was completed, the company raised full-year EPS guidance from a range of $3 to $3.25 to a range of $3.15 to $3.35, and annual organic revenue growth guidance from 4% to 6% to a range of 8% to 9%. The raised guidance does not factor in the Evoqua acquisition.
3 Water ETFs That Hold Top Water Stocks
Here are some tried-and-true ETFs that offer diversification among sectors and companies. All three of these have allocated a significant percentage of their assets to most or all of the four stocks mentioned above:
| Water ETF | Expense ratio |
| Invesco Water Resources ETF (PHO) | 0.59% |
| First Trust Water ETF (FIW) | 0.53% |
| Invesco S&P Global Water Index ETF (CGW) | 0.57% |
Invesco Water Resources ETF (PHO)
Finding the right stocks takes considerable research and effort. You also have to stay on top of your picks to ensure the bullish theses are intact. ETFs such as Invesco Water Resources ETF make it easier to invest in brand categories and sectors. These funds hold onto shares for you, and professionals oversee the funds.
Invesco Water Resources ETF has a 0.59% expense ratio, which means if you invest $10,000 in the fund, you will pay an annual fee of $59. This fee gets deducted from the ETF’s share price, so you will not notice funds leaving your account.
The fund has a price-to-earnings ratio of 22 and allocates 26.7% of its funds to machinery. The second leading category, water utilities, makes up 16.1% of the fund’s assets. Ecolab Inc. (ECL), Ferguson PLC (FERG) and Danaher Corp. (DHR) are the fund’s three top holdings, with about 8% of the fund’s assets apiece. American Water Works, Xylem and Essential Utilities also have substantial weightings.
First Trust Water ETF (FIW)
The First Trust Water ETF is up 10.5% year to date and 88.4% over the past five years as of June 27. The fund has a net expense ratio of 0.53%, meaning the fund will charge a $53 fee if your position is valued at $10,000. FIW tracks the ISE Clean Edge Water Index, including the top 37 stocks in the industry by market cap, and gets rebalanced semiannually.
Ecolab, Advanced Drainage Systems Inc. (WMS), Xylem and Roper Technologies Inc. (ROP) are the top positions in the fund, each holding about a 4% weight. First Trust Water ETF heavily leans into industrials, with more than 50% exposure to the sector. Utilities and health care are in second and third place, with 21% and 11% concentrations, respectively.
Funds like First Trust Water tend to outperform the market during recessions, because people can’t cut back on water in the same way that they can stop buying discretionary goods.
Invesco S&P Global Water Index ETF (CGW)
Invesco S&P Global Water ETF is up 9.6% year to date as of June 27 and 66.8% over the past five years. The fund has a 25 P/E ratio and a 0.57% expense ratio. The fund currently has 45 holdings with an emphasis on mid-cap blend, an asset group that makes up roughly 60% of the holdings.
The fund has more than 90% of its capital allocated across industrials (53%) and utilities (38%). The materials sector comes in a distant third, making up about 6% of the fund’s total allocation. Information technology, consumer discretionary and energy fill in the gap but won’t make much of a difference in the fund’s day-to-day price movements.
The fund’s top holdings are Xylem and American Water Works, at about an 8% weighting each.
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7 Best Water Stocks and ETFs to Buy in 2023 originally appeared on usnews.com
Update 06/28/23: This story was previously published at an earlier date and has been updated with new information.
