Quench your income thirst with water stocks

Steady revenues help to power some healthy payouts.

By InvestorPlace Jun 12, 2012 12:42PM

Image: Man drinking bottled water while driving (© PhotoAlto / SuperStock/SuperStock)By Tom Taulli

Water is far more than a drink. It's critical to manufacturing, nuclear energy and agriculture, among other things, and the demand for water should keep growing -- especially with the continued increase in the world population and the modernization of countries like China and India.

So how can investors benefit on a clearly growing need? One approach is to look at utility operators. True, they don't produce huge gains because of the extensive regulations on rates, but they still have clear advantages.

Among others, water utilities often have monopolies in their markets, and the revenues tend to be steady. Moreover, because of strong cash flows, water utilities generally pay high dividends. However, most are thinly traded (the largest still trades less than 1 million shares per day on average), so you'll want to consider a limit order if you plan to invest.

A few water stocks to consider:

American Water Works (AWK) is the largest publicly traded water utility in the U.S. However, the big opportunity is likely to come from the company's segment that involves building and operating facilities.

The U.S. water infrastructure system is fairly old and will require major upgrades over the next couple decades. American Water Works has lots of experience and engineering know-how in this area, so the growth opportunities look promising.

In the meantime, the company continues to post strong results. During the past year, earnings per share came to $1.73, up from the prior year's $1.46, and AWK has enjoyed a nice 6% gain year-to-date, better than the broader markets' 4%. Meanwhile, AWK has slowly been increasing its dividend since it went public in 2008, and it currently yields a healthy 3%.

Aqua America (WTR) serves 3 million customers in Florida, Georgia, Indiana, Illinois, New Jersey, North Carolina, Ohio, Pennsylvania, Texas and Virginia. A key part of the growth has come from acquisitions, which have totaled close to 200 in the past decade. So far, the strategy has worked. In the latest quarter, net income increased about 25% to $37.9 million. Also helping is Aqua America's discipline in keeping costs under control. And so far this year, WTR shares have gained more than 8%.

What's more, WTR has been paying dividends for several decades, and the company has steadily boosted its payout for years. Aqua America currently pays out 17 cents per quarter, good for a 2.7% yield.

Consolidated Water (CWCO) operates seawater desalination plants and distribution systems in areas of the world where potable water is scarce or nonexistent. Some of its locations include the Cayman Islands, Belize, the British Virgin Islands and The Bahamas.

Consolidated Water is a relatively small company, at a market cap of just more than $100 million. However, it has been posting strong growth -- in the latest quarter, revenues increased by 20% to $16.7 million, and profits were up 18% to $1.34 million. Going forward, the company plans to increase its operations outside the Caribbean. It currently is building a plant in Mexico and is even looking at opportunities in Asia.

At 3.8%, Consolidated Water boasts the best yield of this bunch, and it's trading at a bit of a discount since the beginning of the year after shedding about 9%. It also trades a scant 60,000 shares per day, so make sure to use limit order to keep from buying in too high on a market order.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is author of The Complete M&A Handbook, All About Short Selling and All About Commodities. Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.

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