Water may be a commodity that you don't think about much when it comes out of the tap. But water is essential to life, and, in the business world, it's a multi-billion dollar industry.

Water is a key input in everything from agriculture to food and beverage to cleaning semiconductor wafers. The sourcing, purification, and distribution of water is big business around the world. The threat of climate change makes that more true than ever.

Many climate scientists expect droughts to become more common in the coming years. These events are likely to make the price of water go up. Some believe that mass desalination will be necessary to ensure adequate water supply for the world.

Whatever happens, demand for the resource is increasing while supply is limited. That makes now a great time to consider investing in water stocks since water technology is advancing and the challenge of the climate crisis is likely to spawn further innovations. Most water stocks are utilities, although some can be classified as consumer staples stocks

If you're looking for water stocks to buy, keep reading to learn about six of the best water stocks you can buy today.

A drop of water in a pool

Image source: Getty Images.

Top 6 Water Stocks

Company

Market Cap

Description

American Water Works (NYSE:AWK)

$32.7 billion

New Jersey-based water and wastewater utility serving 15 million people across 16 states.

York Water Company (NASDAQ:YORW)

$656.4 million

Pennsylvania-based purifier and distributor of drinking water.

Essential Utilities (NYSE:WTRG)

$12 billion

Pennsylvania-based provider of water, wastewater, and natural gas services serving 5 million customers.

American States Water Company (NYSE:AWR)

$3.3 billion

California-based provider of water and electricity for customers in the state.

Middlesex Water Company (NASDAQ:MSEX)

$1.8 billion

New Jersey-based water and wastewater utility.

Xylem (NYSE:XYL)

$23.5 billion

Producer of a wide range of water-related products, including pumps, meters, and biological treatment equipment.

Source: Yahoo! Finance and company filings.

American Water Works

American Water Works may be one of the best examples of how boring stocks can quietly crush the market. Founded in 1886, the water utility went public at $21.50 a share in 2008 and was approaching $200 a share in August 2021.

American Water Works is the country's largest water utility stock. Like other utilities, it benefits from being a regulated monopoly, meaning that the company doesn't face competition in the regions it operates. In exchange, its prices are regulated by state and local governments.

Over the years, American Water Works has grown by investing in its own infrastructure through acquisitions and by seizing opportunities in market-based businesses such as its military services group.

The company plans to continue investing in the business. It's forecasting between $22 billion and $25 billion in capital expenditures this decade to drive additional growth.

American Water Works' earnings multiple has expanded considerably as the company has benefited from lower interest rates. This has caused investors to rotate from bonds into dividend stocks and lifted stock market multiples more generally.

While it's worth keeping an eye on interest rates, the company's size gives it an advantage in scalability and in making acquisitions. It also pays a quarterly dividend of $2.41, or a 1.3% yield, as of August 2021. 

York Water Company

York Water Company is the oldest investor-owned water utility in the country, dating back to 1816. The company operates within three counties in south-central Pennsylvania by sourcing, purifying, and distributing drinking water, and it also owns two wastewater collection systems and five wastewater collection and treatment facilities.

As a water utility, its growth is determined by the number of customers and the going water and wastewater rates. Because it can't directly control prices, the best way for the company to grow is by increasing its customer base.

York Water has made a number of acquisitions in its territory to boost its growth, but that has been a slow-growing part of the country. Last year, its total customer count increased slightly from 71,411 at the end of 2019 to 72,681 at the end of 2020.

Its 2020 revenue rose 4.4% to $53.9 million, but the company is also highly profitable, with an operating margin of 45%.

York Water also pays a dividend yield of 1.5%. Its payout ratio is around 50%, meaning that investors can count on the dividend continuing to be funded.

Essential Utilities

Essential Utilities, formerly known as Aqua America, is a water and natural gas utility that serves around 5 million people under the Aqua and Peoples brands.

The company started as a utility in southeastern Pennsylvania and has grown to be a presence across 10 states. It focuses on regulated water and wastewater, along with other utilities. In 2020, it entered the natural gas business by acquiring Peoples Natural Gas company, giving it 750,000 gas utility customers in three states.

Two-thirds of Essential Utilities' revenue now comes from water, with the remaining third from natural gas. The company is focused on growing in areas where it has a critical mass of operations to gain scale and increase efficiency.

Residential water companies have historically increased revenue by about 1% per year — a reminder that utilities tend to be a slow-growth industry — but rising rates helped drive water revenue up 6% last year. With the addition of the gas business, revenue grew 64% last year, and the company is also highly profitable, with a profit margin of 20%.

Essential Utilities currently pays a 2.2% dividend yield and has a long history of raising its dividend.

American States Water Company

American States Water Company is a diversified utility company with several subsidiaries and three segments, including water, electric and contracted services.

As of the end of 2020, the company's regulated utilities had 261,796 water customers and 24,545 electric customers, and it also has a number of military contracts.

A majority of its revenue comes from Golden State Water Company, which is involved in the purchasing, production, and distribution of water in 10 counties in California.

Like other utilities, ASWC benefits from a lack of competition. But its growth has been modest in recent years as revenue increased 3% from 2019 to 2020.

American States Water Company has been less acquisitive than other water utilities, although its profits have grown significantly — from $1.62 per share in 2016 to $2.33 in 2020 — since the company has kept costs relatively flat even as rates have ticked up.

The company has been a reliable dividend payer, offering a dividend yield of 1.6% as of August 2021.

Middlesex Water Company

Middlesex Water Company was founded in 1897 and operates regulated water and wastewater utility systems in New Jersey and Delaware. It has approximately 115,000 customers across those two states.

Middlesex's revenue has been mostly flat over the past five years, increasing from $132.9 million in 2016 to just $141.6 million in 2020, or just about 1% annually. The company has not sought to grow through acquisitions, and operating income has been flat as well. In one of its territories, rates actually decreased in response to the Tax Cuts and Jobs Act of 2017 as the company's tax payments fell significantly after the bill was passed.

Middlesex sees its net income being impacted by four items: weather, rate relief, effective cost management, and customer growth.

The company has been a reliable dividend stock over the years and regularly increases its payout. As of August 2021, the company pays a 1% dividend yield. It has a payout ratio of less than 50%, meaning that it should be able to easily increase its dividend in the coming years.

Xylem

Xylem isn't a water utility but a water technology company. It makes a wide range of products to handle the transportation and treatment of water, pumping and heating, and measurement for meters and data analytics.

With a unique business model, Xylem has no single competitor, but it competes against a wide array of companies across its three business segments. It estimates its total served market to be $60 billion in those segments within a larger addressable market of $600 billion in the global water industry.

The company sees opportunities in emerging markets as clean water becomes more accessible and through technological innovation.

Xylem's 2020 performance was impacted by COVID-19 as revenue fell 7% to $4.9 billion; however, management expects to return to growth in 2021.

Historically, Xylem has been solidly profitable, although its profits have fluctuated. Earnings per share peaked in 2018 at $3.03 and fell to $1.41 in 2020, hammered by the decline in revenue and higher expenses.

Xylem has regularly raised its dividend since its IPO in 2011, and it now pays a 0.9% dividend yield.

Are water stocks right for you?

You might be surprised that a basket of these six stocks would have easily beaten the S&P 500 index over the past decade.

During one of the greatest bull market runs in stock market history, that's an impressive feat for a group of dividend-paying, recession-proof stocks in what's seen as the safe and sleepy utilities industry. Given that track record, diversifying your portfolio with some water stocks looks like a smart move, especially given their position as a hedge against climate change.