While hot weather and drought conditions ravage most of the US, water utilities are seeing record increases in the volume of water they pump, which in turn is pushing their 2012 earnings to record levels.

Water utilities will continue to benefit from a general water shortage, as many states lag behind in building water infrastructure. Water utilities that own water rights enjoy a valuable asset that confers considerable pricing power, because of the lack of available alternatives.

Here are two water utility plays that provide steady income and dividends for investors:

American Water Works (NYSE: AWK) provides drinking water, wastewater and other water-related services to roughly 16 million people in 35 US states and two Canadian provinces. It employs 7,600 and serves customers in the residential, commercial, industrial and public-works sectors. It even serves some key U.S. military bases.

American Water Works focuses on virtually every facet of the water-supply story, from owning wells and source groundwater, all the way up to owning water-treatment plants and pumping stations, storage facilities, and distribution infrastructure.

American Water Works is very aggressive in acquiring assets to grow its revenue base. In May, the company acquired the New York state operations of Aqua America (NYSE: WTR) and also purchased three water systems in Pennsylvania. In late June, American Water Works acquired the water system from the town of New Whiteland in central Indiana.

The results of this strategy are clearly shown in American Water Works’ latest earnings release. The company’s second-quarter income rose by a better-than-expected 32 percent, as higher water use boosted revenue and buoyed margins.

The company raised full-year expectations for earnings per share (EPS) from continuing operations and now expects $2.12 to $2.22 in EPS, up from its previous estimates of $1.90 to $2.00.

American Water Works has a current dividend yield of 2.64 percent. In May, the company announced a dividend increase of 8.7 percent, which takes the payout to $0.25 per quarter. Because the company has a targeted payout rate of 50 percent to 60 percent, there’s plenty of room for additional dividend growth. We give American Water Works’ stock a 12-month price target of 42.

Aqua America (NYSE: WTR) is one of the largest US-based, publicly traded water utilities, serving almost 3 million residents in Pennsylvania, Ohio, Illinois, Texas, New Jersey, Indiana, Virginia, Florida, North Carolina, and Georgia. As of August 2012, Aqua America was supplying water and wastewater services to about 950,000 residential, commercial, industrial and public customers (nearly 3 million residents), with Aqua Pennsylvania accounting for about half of the total.

We expect Aqua America to continue its strategy of expanding its customer base through acquisitions. From 2003 to 2011, Aqua America completed 173 acquisitions or growth ventures. The company is targeting at least 10 deals in 2012 (seven completed year-to-date through July).

Factors driving consolidation in the fragmented water and wastewater industries include economies of scale, environmental regulation, and the need for technological expertise and capital investment.

On July 31, the company reported record second-quarter earnings, with net income up 10 percent to $41.4 million or $0.30 in EPS year-over-year, with revenue up 11 percent to $198 million.

Aqua America’s Board declared a dividend increase of $0.01 per share, from $0.165 per share to $0.175 per share for the December 1, 2012 quarterly dividend, to all shareholders of record on November 16, 2012. This represents a 6.1 percent increase to the quarterly dividend, equivalent to $0.04 above the company’s current annualized dividend rate of $0.66 to $0.70.

The Board also declared the regular $0.165 per share quarterly common stock cash dividend to be paid on September 1, 2012 to shareholders of record on August 17, 2012. Aqua America has paid a consecutive quarterly dividend for more than 65 years; this is the company’s 22nd dividend increase in 21 years.

With a current dividend yield of 2.73 percent, the company has averaged a 5.71 percent dividend increase per year over the last 5 years. The payout ratio of 60 percent indicates more dividend increases are likely in the coming years. We give Aqua America a 12-month price target of 29.

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Greg Pugh, an income-investing expert, publishes a newsletter called Investing for Monthly Income.