Another kind of liquid investment

Even as world market prices soar for food, fuels and (until recently) lumber, it is possible the smartest commodity investment is none of the above.

That would be water, whose bulk prevents wet countries and regions from exporting it to desperately dry places. With the world heating up and serious droughts worsening, H2O is increasingly valuable.

But because water systems are largely under government ownership and control, as an investment idea it has long been a backwater. And there’s no posted world cash or futures price as there is with, say, oil. Nevertheless, the smattering of water company stocks and water-themed funds have terrific returns, this year and over the past five and 10 years. The future looks equally excellent.

The questions are how, where and what income to expect. Water is more of an income-with-growth category than a source of high yields in the manner of popular electric and gas utilities.

American Water (symbol AWK), for example, has seen its share price nearly triple in five years, but its dividend yield is 1.4%. American States Water (AWR) shares have also skyrocketed, trimming the yield; even after a 9% dividend raise effective in September, American States shares are priced to pay 1.7%.

And though water charges are regulated in most places, both stocks sport price-earnings ratios more like those of

Facebook or Starbucks than the lower multiples associated with American Electric Power, Xcel Energy or even AT&T.

Water company CEOs all say on their earnings calls and at analysts’ seminars that they are eager to buy more municipal water systems and to expand nonregulated consulting and engineering businesses. That suggests steady earnings and dividend growth ideal for a buy, hold, collect and grow strategy.

The sector also appears resistant to market jitters. On Sept. 20, when the stock indexes tanked 2% and at one point were down close to 4%, American Water was one of a handful of S & P 500 listings to gain, and Essential Utilities (WTRG) — formerly Aqua America — rose 2%. Aqua America was as rewarding an investment as AWK and AWR for years until March 2020, when it bought Pittsburgh’s natural gas utility, doubled in size and changed its name. Since this transformation, its shares have flatlined. But Essential Utilities yields 2.3% and just hiked dividends 8%.

There are several other ways to dive in: tax-exempt water and sewer bonds, for example, because these essential-service revenue bonds usually outperform general-obligation debt and aren’t directly affected by political wrangles and budget shortfalls. The water industry relies on a variety of manufacturers for pipes, chemicals, pumps and meters; three to look at are Pentair (PNR), Tetra Tech (TTEK) and Xylem (XYL). Two exchange-traded funds worth considering are Invesco Water Resources ETF (PHO) and First Trust Water ETF (FIW), which provide a combination of growth and dividends that should be a comfort if the markets get wobbly in the years ahead.