We all know about investing in commodities like oil, gold, and natural gas. But what about water? How to we invest in water? Despite being the most important element on Earth, it’s never at the top of anyone’s investing list. Without it, there would be no life on this planet. One can even argue that it has an unlimited demand with a long list of use cases. That alone should get the attention of investors.
Table of Contents
- How to Invest in Water
- The Best Water Stocks to Consider in 2023
How to Invest in Water
Figuring out you want to invest in water is one thing, but how can you do it? You might not realize it, but many industries rely on water for their daily operations. It’s not just something to quench your thirst. Water is used in countless industrial processes and is a major clean and renewable energy source.
There are plenty of stocks and ETFs that focus on water-based companies. This article will discuss how you can invest in water and which industries you want to target.
Why Should I Invest in Water?
Remember at the end of the movie The Big Short? We see what each character does with the fortunes they just made. The movie’s main character, Michael Burry, decides to invest in water. In an interview several years later, Burry said:
“What became clear to me is that food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas.”
It is an interesting strategy emphasizing how important water is to our civilization. If you need a reason to invest in water, it is that there is a somewhat finite supply with infinite demand.
One day, there will be a time when we no longer rely on oil to operate our vehicles and machinery. There is a chance that the greatest hedge against inflation and currency volatility in the future is a digital asset like Bitcoin, not gold. But there will never be another commodity that can replace our dependence on water to sustain life.
Where there is water, there is food and sustenance. There is plant life and wildlife and typically a healthy and thriving ecosystem. Water is one of the elements that separates us from other planets. The bull case for investing in water is that it is irreplaceable and helps to maintain life daily.
Which Industries Rely on Water?
As we mentioned, many industries rely on water to carry out their operations. Some of these are obvious, but some might be a surprise. When looking for water-related stocks, consider what sectors you want to invest in. Some ways in which water is used are more noble than others. Here are some of the sectors to look at when investing in water.
Invest in Water With Hydroelectric Power
What is hydroelectric power? This is a form of renewable energy production that utilizes the power of moving water. Often, hydroelectric infrastructure is built right into bodies of water like rivers. This allows the machinery to harness the full and natural power of the water’s energy. Hydroelectric power is one of the world’s largest clean energy and supply sources. According to National Geographic, more than 70% of the world’s renewable power is supplied by hydroelectric power. Which is why you should invest in water.
Water Purification and Services
An entire industry is built around providing cities with clean water for drinking and cleaning. Water purification companies treat water to remove bacteria and parasites from our drinkable water sources. If you want to invest in a sector that will always be around, consider putting water purification and treatment at the top of your invest in water watchlist.
Invest in Water With Water Utilities
You can invest in water with water utility stocks. Utility stocks often get the reputation of being boring with little capital appreciation. While this might be true, they also provide stability and usually come with a solid dividend yield. Some utility companies provide hydroelectric power, but others provide water and wastewater services. They might be boring, but they are essential to our everyday lives.
Food and Beverages
The main reason to invest in water? We need to drink it to survive! There are plenty of companies that provide bottled water to consumers. But nearly every food and beverage product on Earth requires water to produce. If you like juice, soda pop, coffee, or beer, all companies that make these products need water to operate!
We would be remiss if we didn’t mention one of America’s largest and most important industries: agriculture. Each year, nearly 70% of the world’s water supply goes to agriculture to harvest food and other crops. We are talking about the quadrillions of gallons of water annually. If you are looking for one industry to target that uses and relies on water the most, agriculture is where it is at. And it helps to invest in water.
The Best Water Stocks to Consider in 2023
If we invest in water, we need to look at a couple of these stocks.
American Water Works (NYSE: AWK)
American Water Works is one of the largest water utility companies in the country. It serves over 14 million residents across 24 states with water and wastewater services. This New Jersey-based company was established in 1886 but only went public in 2008. Since then, it’s returned over 600% to shareholders in capital appreciation, which doesn’t include reinvestments of its dividend. As of April 2023, AWK pays out a 1.91% dividend yield.
Why is American Water Works such a popular stock? It’s a regulated monopoly and has no competition in the markets in which it operates. This means the government regulates its rates and prices. American Water Works continues to expand its footprint with 26 company acquisitions in 2022. Anytime you can add a regulated monopoly to your portfolio at a reasonable valuation, it’s worth your while.
Essential Utilities (NYSE: WRTG)
As its name suggests, Essential Utilities is another American utility company that provides water and natural gas services to ten different states. While the company maintains a 70/30 base rate mix of water and natural gas utilities, the revenue from both segments is about even.
Essential Utilities serves over 3 million customers, providing over 82 billion gallons of daily water. It operates over 14,275 miles of water main pipes and has 201 wastewater treatment plants. This company is another regulated monopoly with a considerably safe and stable market share. The stock currently pays a 2.69% dividend yield to its shareholders.
Xylem Inc (NYSE: XYL)
Xylem is not a water utility company. Rather, it provides technology and infrastructure to water companies. It teams with several water companies worldwide to help with data analytics and the logistics behind the transportation and treatment of clean water.
While Xylem does most of its business in the United States, it continues to grow its presence in Europe and emerging markets. Xylem recently announced the acquisition of Evoqua Water Technologies.
The new entity will help provide a strong platform to help defeat the world’s water problems. Xylem currently pays a 1.27% dividend to its shareholders. This is a different way to invest in water.
The Best Water ETFs to Consider in 2023
These water ETFs are another great way to invest in water. You can trade ETFs or add them to an investment portfolio.
Invesco Water Resources ETF (NASDAQ: PHO)
The largest dedicated water ETF is the Invesco Water Resources ETF. This fund focuses on global water-related US-listed stocks and is based on the NASDAQ OMX US Water Index. It holds 38 different companies, including all three stocks listed above. Xylem is the third-largest holding in PHO, with an 8.15% weighted allocation. PHO has an MER of 0.59% and pays shareholders a 0.60% distribution.
First Trust Water ETF (NYSEARCA: FIW)
First Trust Water ETF holds 36 different US-listed water-related stocks. All three of the stocks mentioned in this article are listed in the top-six weighted allocations in the ETF. This fund has a slightly lower MER than PHO at 0.53%, with a slightly higher distribution yield of 0.63%. FIW has performed well for shareholders, with a 72.6% return over the past five years. Since its inception in 2007, FIW has provided a cumulative return of more than 300%.
Is Water a Good Investment?
As essential as it is to our daily lives, water is not an overly exciting investment. Many of these companies operate as regulated monopolies in the utilities sector. While this is great for pricing power, this also means there is relatively low growth compared to other industries. Luckily, the investment’s trade-off for less capital appreciation is portfolio stability and a decent dividend yield.
Should you invest in water stocks? Water should be treated no differently from other commodities like oil and gold. There is a near-infinite demand for water from every living thing. But water isn’t exactly a scarce commodity. New technologies are providing clean water solutions in most regions of the world now. It can be a solid sector to invest in, but expect those gains to be more of a trickle than a waterfall!