Perhaps the best thing about utility stocks is that their businesses are virtually guaranteed. As opposed to so many high-flying, speculative stocks who may or may not survive due to questionable fundamentals, people need the services utilities provide.
For investors who love to receive hefty dividends, but are perhaps tired of the usual suspects within the utility sector, an interesting group of specialized utilities may be the solution. I'm referring to water utilities, including American States Water (NYSE:AWR), American Water Works (NYSE:AWK), and Aqua America (NYSE:WTR).
A steady stream of profits and dividends
American States Water operates a traditional regulated market, as well as a growing unregulated business that serves military bases. The regulated business comprises roughly three-quarters of the company's revenue base, and 90% of that segment's customer base is residential and commercial consumers which provide reliable cash flows.
The company has realized 8.8% compound annual revenue growth over the past five years, so its strategy is definitely working. American States Water considers its unregulated business to be a key growth vehicle, since many of those military contracts are signed for 50 years or longer with the U.S. government. Many more military bases in the U.S. are set to be privatized, with lucrative contracts over the next five years likely to propel strong further growth for the company.
Meanwhile, American Water Works generated flat revenue and 1% earnings growth over the first nine months of the year. Unfavorable weather was the primary culprit for the company's disappointing performance. By contrast, favorable weather conditions actually helped earnings by at least $0.13 per share through the first nine months of 2012. As a result, investors should probably give the company the benefit of the doubt for having very tough comparisons this year.
Aqua America's growth strategy mostly involves acquisitions. The company has taken part in nearly 200 acquisitions and growth ventures in the last decade, which have allowed Aqua America to extend its reach across many states in America to diversify its customer base and lower its underlying volatility. The company's strategy has clearly worked, as revenue and diluted earnings per share are both up 26% through the first nine months of the year.
Consistency is the key to shareholder rewards
As should be expected from any utility, the steady and regulated businesses of providing basic essentials to society result in consistent profits. Consequently, investors demand long track records of dividend payments, and these water utilities do not disappoint in that respect.
American States Water increased its shareholder payout by 14% earlier this year, representing the 59th year in a row of a dividend raise. The company targets long-term dividend growth of at least 5% per year, so clearly management takes this commitment seriously.
American Water Works doesn't have a long dividend track record, but because it's only been trading since 2008. However, it's likely to be a long-term dividend winner, as the company has already given investors five dividend increases since its IPO, including a 12% dividend bump earlier this year.
Aqua America is right in line with its peers on the subject of dividends. The company last increased its payout by 9% earlier this year, amounting to the 23rd dividend increase in the last 22 years.
Solid stocks worth considering
The fact that water is a basic necessity of human life means strong underlying economics should be enjoyed by water utilities for many years to come. These companies share many characteristics with their traditional electric utility brethren. Both water and electricity are used in a good economy or bad, and due to their regulated businesses, both types of utilities pass on gradual rate increases to their customers.
At the same time, water utilities provide an alternative as a sub-industry within the utility sector that you may not have previously considered. Water utilities could be a great way to diversify your holdings, while still enjoying the reliable results that utility investors count on. That's why income investors should consider buying American States Water, American Water Works, or Aqua America.
While on the topic of dividends, here are 9 Motley Fool favorites:
Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Aqua America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.