This article will survey the best water stocks to buy in the stock market. Water stocks are becoming increasingly significant part of America’s infrastructure and economy. Demand for water increases as the demand for food increases, and the demand for food increases as the population increases.

Water is a fundamental element to human life, and that means there will always be companies seeking to profit from its creation, storage, and distribution.

Because of the ongoing demand for water, and the fact that it is a public necessity, many of the top water stocks are often utilities. Utilities make for great investments because there will always be demand, and there monopolistic nature requires certain revenue levels be met every year in order to provide service.

From revenue comes cash flow, from cash flow comes business sustainability, and from business sustainability comes dividends.

Water stocks are suited for long-term investors seeking capital appreciation and a little income.

Our 3 Best Water Stocks

If you’re in a hurry, below are our top picks for water stocks as of this writing.

1. American Water Works Company: Consistent and reliable profit.
2. Aqua America: Robust profits and free cash flow
3. Invesco Water Resources ETF: Diversification tamps down risk.

Keep reading and you’ll learn more about each of these water stocks and my thoughts on each.

What Are Water Stocks?

Good water stocks in the market come from three categories.

The first are water utilities. These are government – regulated companies that provide water to customers, as well as collect and treat both potable water and wastewater.

Utilities that handle water fit the category for solid water stocks because they tend to have reliable revenue streams.

That’s because there is a constant flow of demand, pun intended, from human beings who need to use and drink water.

Government-regulated utilities balance the rates that must be charged in order to generate enough revenue for the utility to cover expenses and pay interest on its debt.

The second category of best water stocks are service companies that may augment or supplement the local utility provider. While these companies may not have the same regular, government–regulated revenue stream that a utility does, properly managed growth and expense control can make these companies some of the most valuable water stocks to invest in.

The final category are water stock exchange-traded funds, or ETFs. These are baskets of stocks that cover a range of different types of water–related investments.

How Do You Determine What Qualifies As The Best Water Stocks?

The best water stocks usually have at least one of the following characteristics:

1. Predictable and stable net income
2. Growing cashflow
3. Diversification

Read Also: What’re the best dividend stocks?

Predictable and Stable Net Income

First, the leading water stocks should have predictable and stable, if not growing, net income every year. Water stocks are a little bit different than most other stocks in the market, in terms of valuation, because net income can fluctuate from year to year.

That’s because demand will shift from year-to-year. For example, in very hot summers, demand for water may be very high. But if a certain region has a very cool summer, demand will be less than it was other years.

That will also be true with respect to agricultural needs. In cool and rainy years, less water will be needed to irrigate agriculture. In hotter and drier years, more water will be needed for irrigation.

Growing Cash Flow

The second element one might see in the top water stocks are predictable and stable, if not growing, cash flow from one year to the next. We don’t want to see constantly declining cash flow, because that means a water company may not be able to pay its expenses or pay interest on its debt.

Diversification

The final category that allows a company to be one of the best performing water stocks is diversification. A company that only does one thing with water makes it vulnerable. If something should happen to that revenue source, its business will be in big trouble.

A business that handles water in multiple different ways, or a basket of stocks that holds a number of different water companies that do different things, is preferable.

Here’s a video that gives additional information on investing in water stocks.

American Water Works Company

What is it?

American Water Works Company earns our classification as one of the best water stocks for several reasons. Primarily, it provides diversified water services to some 15 million people, making it the most diverse and largest publicly-traded water company in the market.

After spending a tremendous amount of money over the past few years to upgrade its systems, this investment will make it more attractive to municipalities looking for its services, and generate long-term earnings growth.

American Water Works’ diversification comes in the form of 50,382 miles of transmission, distribution, and collection mains and pipes, 1,313 treated water storage facilities, 80 dams,.

527 groundwater treatment plants, 72 surface water treatment plants, 8 combined treatment plants, 127 wastewater treatment plants, 1,103 groundwater wells, and 1,428 water and wastewater pumping stations.

It pays a dividend of 2.03%, thanks to very reliable net income that remains in a tight range of about $50 million, fluctuating between $423 million and $476 million over the last four fiscal years.

Aqua America

What is it?

Aqua America is a utility, and as such, qualifies it as one of the top water stocks in the market. However, Aqua America has also engaged in a strategy that helped propel its growth over the past several years: acquisitions.

The company’s strategy over the past fifteen years has been to acquire small or local municipal water companies. Because they are smaller, and serve smaller communities, there isn’t enough revenue to keep these utilities afloat.

So Aqua America is able to come in and purchase the service company, using its economies of scale to reduce expenses. It also can use its better capital structure to upgrade the water infrastructure.

Aqua America has very reliable net income, generating between $200 million and $240 million over the past four fiscal years. It uses that net income to pay a modest 2.64% dividend.

Invesco Water Resources ETF

What is it?

Rounding out our list of best water stocks is an exchange-traded fund. Invesco Water Resources ETF holds 35 different water companies. These are the cream of the water crop. The ETF tracks the Nasdaq OMX U.S. Water Index, which holds stocks of companies that offer products that will both conserve and purify water for homes, businesses and industries.

The ETF has an average annual return of 8.26% over the past ten years, making it a very attractive long-term investment. It has a reasonable expense ratio of 0.62%.

The other thing that makes this ETF one of the best water stocks, though, is its diversification. It isn’t just that it holds 35 stocks, but those stocks are diversified across size and sectors. The ETF holds 25% small stocks, 46% mid-cap stocks, and 28% large cap stocks.

It also holds companies that specialize in water-related machinery, chemicals, life sciences, health care equipment, industrial conglomerates, and building products.