With interest rates beaten into the ground by the U.S. Federal
Reserve, investors have been flocking into higher-risk assets to
generate income. One of the most popular destinations has been
utilitystocks , as they provide income-starved retirees with
someyield whileoffering more stability than riskiergrowth stocks
This dynamic has attracted billions of dollars ofinvestment into
utilities in the past few years. Case in point: the
Vanguard UtilitiesETF (
, which is currently trading at a multi-year high while still
carrying a nearly 4%dividend yield . That's almost twice the
yield of the 10-YearTreasury note 's 1.9%.
Take a look at the steadygains below.
But even though utilities are a great place to find yield and
stability, there is one segment of the utilitymarket that stands
out in both categories. These companies are exclusive
distributors of the most precious resource on the planet, benefit
from almostinelastic demand and their product can never be
I'm talking about water utilities.
There are a number of forces driving thebullish trend in water
utilities right now. The first is a simple matter of population
growth. With a growing domestic and global population, limited
water resources continue to be strained. The United Nations
suggests that fresh water withdrawals have grown three times in
the past 50 years, as demand increased by 16.9 trillion gallons
annually. It also estimates that more than 1 billion people
worldwide lack access to clean water.
In the United States, nearly every region of the country has had
to contend with water shortages in the past five years, according
to the Environmental Protection Agency (EPA). The massive
droughts in 2012 were a big part of that, where the Midwest
experienced the worst drought in 100 years. That led to a banner
year for water utilities, with record amounts of water produced
Looking forward, the water-shortage prognosis doesn't get any
better. Even with no droughts, the EPA estimates that at least 36
stateswill suffer local, regional or statewide water shortages in
Domestic water utilities are also benefitting from surging
industrial demand, with the booming farming sector creating
irrigational demand for water and the shale gas revolution
creating record demand for water used during the hydraulic
fracturing process, commonly referred to as "fracking."
[See also, "A Little-Known "Pick and Shovel
Stock for the Shale Revolution"]
Water utilitiesoffer very unique exposure to the most
preciouscommodity on Earth. This has created stability in share
prices and produced outsized yields, both attractive to investors
frozen out of thefixed-income markets.
With this in mind, here is a list of seven of my favorite water
From the list, I have chosen to highlight
American Water Works Co. (Nasdaq: AWK)
because of its market dominance and
Connecticut Water Works (Nasdaq: CTWS)
, because of its yield and growth potential as a small-cap
American Water Works Co.
American Water Works Co. is a powerful waterconglomerate that
operates in the United States and Canada, offering water and
wastewater services to 1,500 communities in 16 states. That makes
American Water Works one of the largest water utilities in the
country, with amarket cap of $7.3 billon. It also owns 80 surface
water treatment plants, 500 groundwater treatment plants, 1,000
groundwater wells, 100 waste-water treatment facilities, 1,200
treated water storage facilities, 1,300 pumping stations and
46,000 miles of mains and collections pipelines.
Shares have been strong, jumping 48% in the past two years and
22% just in the past year. Looking forward,analysts are
projectingearnings growth of 3% in 2013 to $2.22 a share and 6%
in 2014. In the next five years, analysts are projecting annual
earnings growth of 8%, ahead of the industry average of 7.8%. The
company's dividend yield of 2.5% is also better than the 10-Year
Connecticut Water Services
With a market cap of just $313 million and an eye toward growth,
Connecticut Water Services provides water to more than 90,000
customers in 55 towns in Connecticut. But in the past year, with
two strategic acquisitions in Maine that grew its customer base
by 35%, the company is in the process of transforming itself into
a regional player in the lucrative New England market.
Analysts are calling for earnings growth of 3% in 2013 to
$1.46 a share and 6% in 2014. That has shares trading with a
forward price-to-earnings (P/E ) ratio of 19, directly in line
with its 10-year and peer average. The company's dividend yield
of 3.4% is also better than anyTreasury bond , and with abeta of
just 0.49, this is another water utility with a compelling
combination of yield, stability and growth.
Risks to Consider:
The country's water pipeline system is suffering from old
age, which could require water companies to make
capitalinvestments with state and local governments to upgrade
Action to Take -->
Water is one of the most stable and inelastic markets in the
world. That's a great place for investors looking for stability
to pick up some extra yield. These are seven of the highest
yielding water utility stocks in the market. My favorites from
the group are American Water Works Company because of its
dominant market position and Connecticut Water Services because
of its yield and growth potential.
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