Bob Ciura: Dividend stocks are all the rage these days, and for good reason. The stock market, as measured by the S&P 500 index, yields just 2% on average. And with interest rates stuck near zero, bonds don’t offer much income right now.
Fortunately, for investors willing to dip their toes into the stock market, there are plenty of highly profitable companies that pay market-beating, secure 2%-3% dividend yields.
One of the most popular sectors of the stock market for dividends is the utility sector. Within utilities, one group that does not get much attention is the water utility industry.
But investors should not overlook water utilities. After all, water is a basic necessity of life, which makes water utilities highly recession-resistant. This leads to consistent profitability and reliable dividend payouts, which is why income investors should consider American Water Works (NYSE:AWK), American States Water (NYSE:AWR), Aqua America (NYSE:WTR) and California Water Service Group (NYSE:CWT).
Profit From One of Life’s Necessities
It goes without saying that life as we know it cannot exist without water. That in itself should make investors feel very comfortable about the water utility business model. These companies have been around for several decades, and have rewarded shareholders with steadily rising profits and dividends along the way.
Founded in 1886, American Water Works is the largest publicly traded U.S. water and wastewater utility company. It projects $2.55 to $2.65 per share in operating earnings this year, which would be right in line with management’s long-term objective of 7%-10% annual operating earnings growth.
American States Water reported 9% earnings growth over the first half of 2015, year-over-year, thanks to favorable rate increases. That is the nice feature of regulated utilities: they can pass through modest rate hikes each year, which all but insures steady earnings growth.
Similarly, this is why Aqua America managed solid 4.7% growth in revenue and 9% earnings growth through the first half of the year.
Meanwhile, California Water Service reported flat earnings per share over the first half of the year, but its $0.21 per share in profits last quarter was more than enough to cover its $0.168 per share quarterly dividend.
Dividends Will Keep Flowing
As utilities, investors should fully expect to see rising dividends each year, and these stocks have not disappointed on that front.
American Water Works yields 2.4%, and earlier this year increased its dividend by 10%. The company has raised its dividend each year since its initial public offering in 2008. This is the third year in a row of double-digit dividend growth.