Tap Into a Steady Dividend Stream With These 3 Water Stocks

All investors thirst for that elusive investment that let's them tap into a steady stream of income -- a stock that just lets the compounding magic of dividend growth flow in. That only works, however, if you pipe into the rare stock that has long-term sustainable demand for a good and service. One place investors can find such investments is in water stocks. These tend to see very stable, and steadily rising demand. Over time, this allows these companies to produce higher payouts to shareholders. In this article, we'll take a look at why water stocks should appeal to long-term dividend growth investors, and give three that we've pooled together: Why Water Stocks? Water is an essential part of human life. Not only do people need water to drink, but it is needed for washing and cleaning, cooking, irrigation of crops, as well as countless industrial uses. Water is the essential ingredient for all of these activities and has no substitute. Water is always in demand, and is increasingly more so as the global population grows. In investing terms, this means that the companies that provide this product should continue to see rising revenue and, one would think, rising profits from this mega-trend. While, water companies tend to have little pricing power, because they are regulated entities, profit margins are built into pricing models, so profitability typically remains quite strong. In addition, there are companies that are not regulated utilities, but produce services or products that support the water industry. Now, let's take a look at three examples of strong dividend growth water stocks. Filtering Through Three Stocks Our first stock is Pentair , a company that is not a regulated utility, but is a company that provides a huge variety of products that support water services and products worldwide. Pentair operates two segments, with one called consumer solutions, and the other related to industrial and flow technologies. The consumer-oriented segment provides residential and commercial pool equipment, water treatment products, control valves, filter products, and much more. The industrial segment manufactures and sells fluid treatment products, water supply and disposal solutions, pumps, spray nozzles, fire suppression, flood control, and much more. Pentair was founded in 1966, produces over $4 billion in annual revenue, and trades with a market capitalization of $8.4 billion. Pentair is also an exceptional dividend growth stock, having boosted its dividend for 45 consecutive years. In the past few years, Pentair has averaged dividend growth of just over 4% annually, so it's produced steady inflation protection for shareholders. Pentair's yield today is 1.6%, which is better than the S&P 500, but on the lower end of yields for pure income stocks. We think Pentair can grow at 6.5% annually in the years to come, so the stock offers a mix of capital appreciation potential, along with many years of future dividend growth. Our next stock is Consolidated Water , a regulated utility that is based in the Cayman Islands. Consolidated serves a variety of retail, industrial, and commercial customers in the Caribbean, and is more of a traditional water stock that provides the actual product to customers. Consolidated was founded in 1973, generates just over $70 million of annual revenue, and trades with a market capitalization of $166 million. Unlike Pentair, Consolidated does not have an active dividend increase streak. However, its current yield is quite strong at 3.2%, putting it at more than double that of the broader market. We also see the potential for robust growth ahead for Consolidated at about 7% annually, so there should be sufficient capital available for dividend increases in the years to come. We note that Consolidated's earnings have been somewhat volatile in recent years, but the current payout should be quite safe at under 60% of earnings. Our final stock is American Water Works Company , a water and wastewater services provider that is based in New Jersey. The company supports 1,700 communities in 14 states, with a customer count of about 3.4 million. The company also has over 500 water treatment plants, 52,000 miles of distribution pipes, 1,700 pumping stations, and 1,300 storage facilities for treated water. The company was founded in 1886, generates $3.7 billion in annual revenue, and trades with a market capitalization of $28 billion. Those figures put American Water Works near the top in terms of water stocks available in the market today. The current yield is 1.8% following some recent weakness in the stock. American Water Works has a dividend increase streak of 13 years, but it's the rate of dividend increases that should impress prospective shareholders. In the past decade, the company's average dividend increase is nearly 10%, meaning this company is at the forefront in terms of pure dividend growth, even among non-water stock. Even so, the payout ratio is only just over half of earnings for this year, and we expect 8% annual growth in the years to come. The low payout ratio and high rate of earnings growth should provide plenty of room for future dividend growth in the years to come. Water stocks have the constant tailwind of the mega-trend of more and more water needed to support population. This is particularly true in more developed economies, where we see increased use from industrial and commercial customers.

Tap Into a Steady Dividend Stream With These 3 Water Stocks

Here we'll dive into Pentair, Consolidated Water, and American Water Works -- all names buoyed by the world's increasing thirst for more water.

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