Want a commodity that really lets the cash flow? Then you need to look at water stocks. Often ignored by investors for more “sexier” natural resource fare, water could be the key to finding some pretty big dividends. It’s a classic tale of scarce and dwindling supplies coupled with rising global demand.
To start with, water’s current abundance is misleading. While it covers the bulk of the planet’s surface, only about 3% of the water on our planet is fresh water and less than 1% of that is even available for human consumption. That’s a problem as the demand for freshwater is growing twice as quickly as the global population. Expanding that further, during the 20th century, the global population tripled while freshwater withdrawals increased by a factor of 6.
Meanwhile, that demand is putting increased pressures on old and outdated infrastructure. Analysts at HighTower predict that the world will need to spend around $22 trillion on water-related infrastructure projects over the next 20 years just to keep things how they are.
Both of these factors mean that the various water stocks will be swimming in cash flows for quite a while. And those cash flows can mean some big dividends for investors.
Here’s three boring water stocks that pay some quality dividends.
3 Boring Water Stocks that Pay Dividends: Lindsay Corporation (LNN)
While the headline dividend yield at Lindsay Corporation (LNN) is pretty low among water stocks, the firm has paid out consistently larger and larger dividends since going public in 1990. LNN has managed to increase its quarterly payout for the last 12 years — the latest was a 4% bump.
And there’s a pretty good chance LNN will keep the cash flowing back to investors.
That’s because when it comes to water stocks, LNN is a niche specialist. Lindsay manufactures water-saving irrigation equipment for farmland. About 70% of freshwater demand is used by farming, but more than half of what is used is lost to runoff and evaporation. LNN’s products are more than just sprinklers. These computer guide pivot irrigation systems including everything from GPS systems to soil-moisture sensors. More importantly, they help farmers save on water costs.
This fact has helped Lindsay pick up market share from rival irrigation water stocks and has helped the firm become a profit machine. Its latest earnings beat analyst expectations by more than 45%.
So while it isn’t the highest yielding water stock, LNN still could be one its best dividend growers.
3 Boring Water Stocks that Pay Dividends: Middlesex Water (MSEX)
When investors tend to think about water stocks and dividends, their minds immediately go right to water utilities. Stalwarts like Aqua America (WTR) and American States Water (AWR) have been dividend champions for years. However, for really high-yielding water stocks, investors need to think small with regards to water utilities.
Middlesex Water (MSEX) is just such a company.
MSEX is mid-sized water utility that owns and operates regulated water utility and wastewater systems in New Jersey, Delaware and Pennsylvania as well as operates contract municipal water facilities. There’s nothing too particular exciting about its operations — there’s no fracking pipes or other unregulated growth elements. What is exciting is the fact that MSEX generates plenty of free cash flows, which it is using to fund new projects and pay down debt. It consistently grown earnings per share over the last five years.
All of which, has made MSEX a pretty strong dividend payer.
Middlesex currently pays a 3.3% yield, but only has a payout ratio of about 70%. That’s means there could be plenty of increases for shareholders down the line as its debt is repaid and cash flows increase. And history is on MSEX shareholder’s side, the firm has paid a dividend every quarter since 1912.
3 Boring Water Stocks that Pay Dividends: Veolia Environnement (VEOEY)
Investors looking for high-yielding water stocks shouldn’t just focus on the U.S. In fact, France’s Veolia Environnement (VEOEY) is an environmental and water powerhouse. The firm’s operations provide drinking water to more than 96 million people and treats wastewater for 60 million people worldwide. That huge presence gives it an enviable position among water stocks.
The problem for VEOEY has been its debt load.
Just before the global recession, Veolia ramped up its efforts to be the world’s water, waste and recycling company. As such, it took on a lot of debt for acquisitions and buyouts. That became a problem as the downturn happened. Since then VEOWY has sold off non-core assets, become more efficient by focusing on just three core areas and paid down debt.
That’s allowed VEOWY to finally begin paying its hefty 3.4% dividend out of free cash flows — something it hasn’t done really since the recession. And with revenues starting to ramp up and more debt being paid down, Veolia could finally live up to its boring water stock promise and turn on the spigot when it comes to dividends.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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