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This page lists companies that are involved in the treatment, transportation, bottling, and desalination of water. How to Invest in Water Stocks.

Utility stocks are appropriate for nearly every portfolio. The primary reason for this comes down to a simple matter of supply and demand. The demand for resources such as electricity and oil continues to grow. But supply is finite. That creates an ideal setup for investors.

And perhaps the most vital resource of them all is water. This article focuses on water stocks. We’ll go over why water is such a vital resource, why investors should be interested in water stocks and how to invest in water stocks. We’ll also look at some of the best water stocks from a historical perspective. And for fund investors, we’ll provide a list of some of the best funds that provide exposure to water stocks.

Water is an indispensable resource. Whether drinking it, cooking with it or using water for cleaning most of us use gallons of water daily without much thought. According to Dripfina the average American household uses approximately 300 gallons of water each day. That translates to 100 gallons of water usage by every American per day. That number may seem unbelievable until you consider that every toilet flush uses 1.5 gallons of water. And this water usage is reflected in the price of water. In the United States the average monthly water bill is over $70. And it ranges from as low as $18 to as high as $91.

And those statistics only consider domestic use. Water is used in a variety of commercial applications including industrial, thermoelectric power, irrigation, and mining. In fact, agricultural irrigation accounts for nearly 70% of fresh water consumption. And the energy sector is the second largest consumer of water. That is contrasted with consumer consumption which totals 10%. Water is also a critical resource for data centers. According to some estimates, the typical data center uses between three and five million gallons of water every day.

Factored altogether, the total market size of the global water market as of 2021 is estimated to be $500 billion with $100 billion of that coming from the United States.

Water Scarcity is a Real and Growing Concern

Although 70% of the Earth is covered by water, the distribution of the water is uneven. In fact, nine countries hold 60% of the world’s total fresh surface water resources. Not surprisingly these include several of the world’s largest countries, the United States, China, and India. 

This means in certain parts of the world, and even in the United States, water is becoming an increasingly scarce resource. A United Nations study on Water Scarcity cited the fact that 2.3 billion people live in “water-stressed” countries. This means that they use up greater than 25% of their fresh water resources every year.

That means that water scarcity may be the reason over 700 million people are displaced by 2030. And the World Bank estimates that countries who face water scarcity may face a total loss of 6% in their gross domestic product (GDP).

And aside from scarcity issues, the need for industrialization and its use in agricultural applications means that worldwide demand is only going to increase.

Why Invest in Water Stocks

So far, we’ve focused on the supply/demand dynamic. That imbalance is a good enough reason for investors to consider water stocks.  Simply put, water is becoming increasingly scarce and that makes it an ideal choice for investors who want to add commodities as part of a diverse portfolio. However, there are other reasons to invest in water stocks, and we’ll go over some of the more salient ones for investors.

Although 70% of the earth’s surface is covered in water, approximately 97% of that water comes in the form of saltwater. And only about 1% of the world’s water is immediately available for human consumption. That fact highlights the need for water to be treated to ensure it is safe for everyday applications. The water purification is a detailed, regulated process and there are several companies that compete in this space. That opens up another avenue for investors to think about water stocks.

A related area that is growing in popularity is water monitoring. Spending on digital water hardware, software, and services that check for water quality is growing at a rate of approximately 7% per year.

An Infrastructure That Needs to be Upgraded

Just like the electrical grid, the world’s water infrastructure will need to be upgraded. This is one of the largest investments that utilities and other water-related companies need to make. Pumps, valves, tanks and other equipment need to be upgraded. According to the research firm Canaccord Genuity, this maintenance will grow at a rate of about 10% a year. In fact, $111 of the 2021 Infrastructure Bill is earmarked for upgrading the United States water infrastructure.

Another consideration for investing in water stocks is the growth in demand for bottled water. That demand is increasingly coming from international markets. In 2018, the United Nations issued a study that noted that 177 countries rely on desalination for at a portion of their freshwater consumption.  And demand in the United States continues to grow as well. Between 2010 and 2020, Americans bottled water consumption increased by 61% on a per-capita basis. That calculates out to each American drinking approximately 45 gallons of bottled water every year.

Bolster the Defensive Part of a Portfolio

Like every utility, water is a highly regulated industry. One consequence of this for investors is that many utilities don’t have the pricing power that can lead to strong capital growth. However, one benefit to regulation is that it protects the existing companies that create barriers to entry. To that end, there is a consolidation going on in the industry which is resulting in a handful of large conglomerates. That means that many of the best water stocks offer predictable cash flow and dividends that can help improve an investor’s total return.

How to Invest in the Business of Water?

If you’ve read this far, you know the scope of the water industry and why you should invest in the business of water. In this next section, we’ll look at the different ways that investors can invest in water stocks.

The most direct way is to invest in futures contracts. For those unfamiliar with futures contracts they allow you to essentially place a bet on the future price of water. Specific to the water industry, the Chicago Mercantile Exchange allows investors to buy futures contracts on the value of the Nasdaq Veles California Water Index. However, investing directly in commodities also requires investors to have a high degree of liquidity including comfort with buying on margin. This outsize risk is why bidding on futures contracts is typically best left to experienced, sophisticated investors.

Buying Equities of Water-Related Companies

Another way to invest in the water sector is to buy shares of companies that profit from water-related businesses. Utilities are an obvious choice. But this can also mean investing in the wastewater treatment sector. This includes companies that are actively involved in water treatment and those that provide needed equipment such as pumps and valves.

Look at Water Index Funds

A strategy for investing in water-related companies is to look at the holdings of the various index funds that are tied to water. The list will range from the companies listed above as well as beverage makers and investors will also gain access to some blue-chip companies that are making strategic investments in the water industry. This is an indirect way to play the sector. However, it does offer exposure to companies that not only pay dividends but give investors the ability to reinvest those dividends in dividend reinvestment plans (DRIPs).

Of course, investors can invest directly in the indexes themselves. Here are some of the most popular indexes that track water-related investment opportunities:

What Are the Best Mutual Funds/ETFs That Include Water Stocks?

Many investors feel more comfortable having all or just a portion of their portfolio invested in mutual funds or exchange-traded funds (ETFs). And so it won’t surprise you that there are a number of funds that give investors diversified exposure to a basket of water stocks.

The largest of these ETFs is the Invesco Water Resource Portfolio ETF (NASDAQ:PHO). This fund invests exclusively in U.S.-based businesses and diversifies among mid- and small-cap companies. Another option is the iShares U.S. Utilities ETF (NYSEARCA:IDU) which gives investors exposure to water-related stocks along with other utilities.

Some Final Thoughts on Water Stocks

Water stocks are a good way to give your portfolio some defensive protection. That’s because demand for water is only going to increase. And that means many of these companies generate consistent cash flow and pay regular dividends.

Investing in water-related businesses can be boring business. But it’s also big business and it’s likely to become more profitable in coming years. This will largely be due to the fact that water is becoming a scarce resource. But it will also be due to ongoing infrastructure upgrades as well as the emergence of new technology that is helping to improve water quality.

Investors have many ways to invest in water-related businesses and between individual equities and mutual funds/ETFs there are solutions for investors of all risk levels.

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