Source:, Flickr.

Dividends: They're the heartbeat of any well-diversified investment portfolio.

Investors might take the value of a quality dividend for granted, but according to an ABC News report in 2012, dividend yield and growth comprised 90% of the S&P 500's nominal return for investors between 1910 and 2010.

Dividends can fill a number of key roles for investors, including:

  • The provision of supplemental income which can be vital to retirees and crucial for younger adults looking to use the power of time to compound their gains.
  • Softening the blow for investors when downdrafts in the stock market occur.
  • Providing evidence to the sustainability of a business model and its cash flow.

Keeping this in mind, it's no wonder why more than 1,900 companies over the $300 million market cap mark, based on data from Finviz, have paid some form of dividend over the past year, whether it be a one-time special dividend or some form of regular monthly, quarterly, semi-annual, or annual payout.

But, just because a company pays a dividend doesn't make that dividend worth the paper it's printed on. Dividends need to strike the right balance of growth, value, and sustainability to truly be worthy of your hard-earned money.

One sector, in particular, hits on all of these points and is a veritable stronghold of dividend greatness. In fact, this mystery sector has not one, two, or three ... but five stocks which have raised their dividend on an annual basis for at least the last 41 years!

Would you care to venture a guess as to what sector is behind door number one?

If you said the utilities industry you get a consolation pat on the back. But, if you specifically singled out water utility stocks then you've identified a holy grail of dividend investing.

Source: Steve Johnson, Flickr.

Why water utilities?
The premise behind investing in water utilities is actually quite simple.

Water may cover much of the Earth, but drinkable water is a finite resource. People may have plenty of wants and needs, but when it comes down to life's bare necessities we, as well as plants, animals, and other sources of the food chain that make life possible, all need water. It is perhaps the best example of an investable basic-needs product in existence.

Why does this matter? Basic-needs products have relatively stable demand that doesn't change when economic conditions change. This means consumers are still going to demand water when we're in a recession in the U.S. just as much as when the economy is rapidly expanding.

In addition, basic-needs products are usually price inelastic -- and water is no different. Water utilities understand that water is a product that consumers need to have, so the incentive to cut prices doesn't exist. Adding icing to the cake, a number of the largest water utility businesses in the U.S. are regulated, which adds even more predictability to the industries' profit potential.

But, there are even more catalysts to water stocks than merely supplying "basic-needs products." The potential for water demand growth in emerging market economies and even the Southwestern U.S., as well as the need by the oil and gas industry when it comes to using water in the fracking process to retrieve assets buried beneath rock deep underground, are just two of many instances where water investors could be poised to see benefits as increased demand leads to healthier profits and improved cash flow.

Five water utility stocks bubbling over with dividend growth
The end result of water's steady and growing demand is predictable and growing cash flow for a number of the sectors' largest companies. Here's a quick rundown of the impressive dividend streaks and yields that the following five water utilities are currently sporting:


Dividend Streak

Current Yield

American States Water (NYSE:AWR)

60 years


California Water Services Group (NYSE:CWT)

46 years



46 years


Connecticut Water Services (NASDAQ:CTWS)

44 years


Middlesex Water Co. (NASDAQ:MSEX)

41 years


Source: Company press releases, Yahoo! Finance.

To put these figures into some context, of more than 6,700 stocks that investors can purchase on the NYSE, Nasdaq Composite, NYSEArca exchange, or over-the-counter bulletin board, just 54 sport a streak of 40 years or more of annual dividend increases. The water utility sector alone holds claim to five of those 54 spots.

AWR Dividend Chart

AWR Dividend data by YCharts

As you can see from the above comparison we've seen some steady dividend growth from these five dividend aristocrats since 2002, with California Water Services Group bringing up the "caboose" with 16% total dividend growth, and American States Water, with its 60-year increase streak on the line, boosting its payout by close to 97%.

These water utility providers are also hitting the sweet spot for shareholders in terms of their payout ratio (the percentage of their earnings per share that they're paying out in the form of a dividend). A low payout ratio leaves plenty of room for improvement, but also demonstrates a company may not be doing all it can to share profits with investors. Conversely, a high payout ratio is welcome by shareholders in the short-term, but it brings into question the sustainability of a company's dividend growth potential over the long run.

Among these five dividend aristocrats the payout ratios range from a low of 51% with American States Water to a high of 74% with Middlesex Water Co. This isn't too surprising considering that Middlesex has the highest yield and American States Water the lowest among the group. This sweet spot -- between 50% and 75% -- gives these utilities ample room to steadily grow their payout while also adding a buffer in case growth somehow isn't up to par.

AWR Chart

AWR data by YCharts

Because of their steady dividends and the basic-needs product they supply, investors who've been patient with water utilities over the long run have been handsomely rewarded with gains of as much as 1,800% over the past three-plus decades. With steady returns like these, it's a wonder why water utilities aren't a staple in more investors' portfolios.