As a group, water utility stocks slightly outperformed the broader market in the first half of this year. That's probably little comfort, however, for investors in these stocks, since the first half of 2022 was the S&P 500 index's worse first half-year since 1970.

For this period, the average return for a water utility stock in the group included in the below chart was negative 16%, whereas the S&P 500's return was 20% in the red. 

During the first half of the year, utilities in general likely benefited from some investors rotating into more stable, lower-risk stocks. However, the group was probably hurt to some degree by rising interest rates. When rates are on the upswing, some income-oriented investors will move money out of dividend stocks and into fixed-income investments.

Water drops falling into body of water and creating ripples.

Image source: Getty Images.

Water utility stocks' first-half 2022 performance

This chart includes stocks of water and wastewater utilities that operate in the United States and have market caps of at least $300 million (meaning they're at least small-cap stocks). They are listed in order of first-half 2022 performance. 

Company Market Cap Dividend Yield Wall Street's Projected Annualized EPS Growth Over Next Five Years First-Half 2022 Return 10-Year Return
Artesian Resources (ARTNA 0.17%) $476 million 2.2%  4%   7.4% 218%
Essential Utilities (WTRG 0.23%) $12.4 billion 2.3%  6.8% (13.6%) 202%
SJW Group (SJW 2.43%) $2.0 billion 2.2% 9.8%  (13.8%) 238%
York Water $585 million 1.9% 4.9% (18.4%) 184%
American States Water $3.1 billion 1.7% 4.4% (20.5%) 422%
American Water Works (AWK 0.96%) $27.9 billion 1.7% 8.3% (20.6%) 451%
California Water Service $3.1 billion 1.8% 11.7% (22%) 286%
Middlesex Water $1.6 billion 1.3% 2.7% (26.7%) 509%
S&P 500 -- 1.62% -- (20%) 242%

Data sources: Yahoo! Finance and YCharts. EPS = earnings per share. Returns in boldfaced beat the S&P 500's return. Data as of 7/1/22, except for first-half 2022 performance, which is to 6/30/22.

Interestingly, the four stocks that outperformed the S&P 500 in the first half of 2022 are the only ones that underperformed that index over the last 10 years.

Artesian Resources was not only the best performer of the group in the first half, it was the only water utility in the above group that had a positive return over this period. The company provides regulated water and wastewater services and some other related services on the Delmarva Peninsula, which includes most of Delaware, and parts of Maryland and Virginia.

Artesian's EPS results in the two quarters that it reported this year (the fourth quarter of 2021 and the first quarter of 2022) were not impressive. In Q4 2021, EPS edged down 3% year over year, while that metric rose 4% in Q1 2022.

My guess is that two factors could be behind the stock's solid performance in 2022. First, the stock was an underperformer relative to the group in the prior three-year period, so its valuation might have attracted some investors. Second, in January, the company acquired Tidewater Environmental Services from Middlesex Water, which more than doubled its number of wastewater customers in Delaware.  

Income investors should know that Artesian's last two dividend increases have been meager. In 2022 and 2021, the company raised its dividend by 2% and 4%, respectively.

By comparison, industry giant American Water Works -- whose stock remains my favorite of the group -- hiked its dividend by 8.7% in 2022 and by 9.5% in 2021. Moreover, through 2026, management expects dividend growth to average at the high end of the 7% to 10% range. Indeed, along with other factors, this rosy dividend growth projection makes American Water Works one of the best dividend stocks that you can buy and hold for a very long time.

Essential Utilities took the silver medal for first-half performance. This company changed its name from Aqua America in early 2020 when it closed on its acquisition of Peoples, a large regulated natural gas utility. In total, the company has regulated operations in 10 states, eight states for water and wastewater and three states for gas. (Pennsylvania -- the company's home state -- is the overlap state in this count.)

In general, water utilities are more conservative investments than gas utilities because demand for water and wastewater services is more stable, as are prices. Investors should keep this in mind when choosing stocks. 

Rounding out the top three is SJW Group, which has regulated water and wastewater operations in California, Texas, Connecticut, and Maine. This seemingly odd geographic grouping stems from California-based SJW's 2019 acquisition of Connecticut Water, which expanded its operations to include the two East Coast states.

Investors should keep in mind that a half-year is a relatively brief period. For a stable group like water utilities, it's best to consider a stock's long-term track record when making investment decisions.