Best Water Stocks to Buy

Advanced Drainage Systems

• Market value: $6.8 billion
• Dividend yield: 0.6%

With 100-year storms and 1,000-year floods becoming more common – the recent rains that nearly drowned Fort Lauderdale, Fla., are just one example – managing stormwater runoff is a top priority. Such efforts aim to protect property, keep drinking water clean and minimize pollutants getting into freshwater streams and rivers.

That's where Advanced Drainage Systems' (WMS) corrugated plastic piping and drainage products shine. Once stormwater hits its drains, its filters remove contaminants, its pipes direct the water away from streets, stores and homes, and its water-cleaning processes return clean water back into waterways. 

"It's my favorite water stock," says Michael Halloran, an analyst at investment firm Baird. "They help put water back where it's supposed to go safely." Investors with time horizons of three years or more should fare well, he says. 

Shares of Advanced Drainage Systems are on sale after tumbling 16% in the past year. The stock has been hurt by high borrowing costs, inflation and slowing U.S. construction demand. But the shares offer good value now. Shares trade at just 15 times estimated year-ahead earnings, near the low end of its 10-year range, according to Zacks Investment Research.

Advanced Drainage Systems is a pure-play water stock that gets most of its revenues (95%) from water-related activities, according to investment research firm Morningstar. 

Despite the stock's recent stumbles, its annualized gain of 29% over the past three years has handily outpaced the mid-teen-percentage returns of the S&P 500 and, perhaps more appropriately for this mid-cap stock, the high-teen-percentage returns of the S&P MidCap 400. A dividend with a five-year annualized growth rate of more than 11% adds to its appeal. 

Badger Meter

• Market value: $3.9 billion
• Dividend yield: 0.7%

You can't conserve water or spot unsuspected leaks unless you measure and monitor usage 24/7. Badger Meter's (BMI) products accurately measure water usage and flows for water utilities, municipalities, and industrial companies worldwide. The company's slogan is "Every Drop Counts." Nine of every 10 dollars in revenues is water-related, Morningstar says. 

Companies such as Badger Meter aren't sexy. But analysts say there's an opportunity investing in water gear, such as meters, flow instrumentation and pressure-monitoring products. 

Despite a rocky period for stocks, Badger Meter, with a market value of $3.9 billion, has been on a tear the past 12 months, soaring 65%. That's a home run when compared with the S&P 400's 1% gain. 

"We expect Badger Meter to benefit from increased use of advanced water-metering infrastructure and water-conservation efforts," says Kristina Ruggeri, an Argus Research analyst who rates the stock a Buy. 

The downside? Badger Meter's valuation is now pricey, at 49 times estimated profits for the year ahead, so this is a stock you'll want to buy on dips. Looking ahead, the firm should benefit from a large order backlog as supply-chain hiccups ease, Ruggeri says. Badger should also see greater demand for its intelligent water-measurement products thanks to increased federal spending on water-infrastructure projects. 

The company is coming off a solid 2022 and a blockbuster first quarter, posting record quarterly revenues that were up 20% from the same quarter the previous year. CEO Kenneth Bockhorst says "demand trends remain healthy" for 2023. 

Ecolab

• Market value: $47.8 billion
• Dividend yield: 1.2%

Ecolab (ECL) offers another spin on the water megatrend. The company is best known for cleaning and sanitation processes that help its hotel, school, laundry and restaurant customers reduce water usage when washing dishes and doing laundry. 

"It's a water treatment, purification and hygiene play," says Sharvari Johari, a senior sustainable research analyst at American Century Investments. 

With a market value of $47.8 billion, Ecolab is the largest water stock we're highlighting here. It's off to a bullish start so far in 2023, with a 16% stock gain, compared with 9% for the large-cap S&P 500. Ecolab notes that it derives roughly 70% of sales from water-related businesses, so it's a juggernaut in the water-stock world. The company's Global Industrial unit, its largest division, provides a majority of the company's $14 billion annual revenues and is almost entirely water focused. 

What's more, Morningstar equities strategist Seth Goldstein expects that Ecolab's industrial water business will be the company's largest source of incremental profit growth. The continued rise in costs for freshwater used by homeowners and commercial operations, which Goldstein expects to double in the U.S. by 2030, is also bullish. "This will make Ecolab's systems more valuable, as they reduce customer water usage and expenses," he notes. 

Investment firm UBS Securities, which rates Ecolab a Buy, recently upped its price target to $189 a share from $180, which represents a 13% gain from current levels. According to UBS, the company, which benefited from imposing surcharges last year to offset higher costs, is likely to raise prices 6% to 7% this year. That added revenue, coupled with cost-cutting measures and lower prices for the raw materials and chemicals it uses to make its products, should enable the company to return to "Ecolab-like" quarterly profit growth of 10% or more, following a 4.5% dip in earnings per share last year. UBS sees Ecolab increasing annual profits by 20% in 2024.

Essential Utilities

• Market value: $11.3 billion
• Dividend yield: 2.7%

This regulated utility stock (formerly Aqua America) is perfect for investors looking to add stability and a plump dividend to their portfolio. Essential Utilities (WTRG) delivers reliable and clean water to 5.5 million customers in 10 states and upgrades aging water infrastructure to enhance services. 

The company is no longer a pure water play since acquiring a natural gas utility in 2020. But Essential still generated a record $1.08 billion in sales from its water segment last year, accounting for about half of its total revenues. 

Wall Street likes what Essential is doing, as eight of 11 analysts rate the stock Buy or Outperform, according to research service S&P Global Market Intelligence. 

There are many bullish pillars to the stock's investment thesis. It has a dividend yield of 2.7%, and the dividend has grown at a 7% annualized clip over the past five years. Consistent payouts are the norm: The company says it has paid a consecutive quarterly dividend for more than 78 years.

The utility's secret to success is its growth-by-acquisition strategy. Purchasing smaller water utilities – mainly municipal-owned systems – enables Essential Utilities to expand its revenue rate base and gain new customers. 

Noting that 85% of the U.S. population is served by a municipal water utility, Morningstar utilities strategist Travis Miller says the utility has "a long runway of acquisition growth opportunities." Essential Utilities said the pipeline of acquisitions it is now pursuing could bring in 400,000 new customers this year. 

Its ability to get approval from regulators to raise rates and pass on surcharges to customers in order to offset costs of infrastructure upgrades bodes well for the bottom line. "The surcharges have been a source of steady revenue," says Ruggeri, of Argus. The stock isn't expensive. Its price-earnings ratio of 23 is at the bottom of its long-term historical range of 23 to 40, according to Zacks.

Pentair

• Market value: $9.6 billion
• Dividend yield: 1.5%

Water is most useful when it's sparkling clean, whether it's in your backyard swimming pool, a coffee maker, a brewery or an industrial enterprise. Filtering out bacteria, contaminants and other pollutants is where water-filtration leader Pentair (PNR) excels. 

"It's a best-in-breed water company," says Glazer, the Fidelity Water Sustainability Fund manager. The portfolio counts Pentair among its top 10 holdings. "They have really smart solutions. They're all about driving innovation for customers."

The bulk of Pentair's business (which accounted for nearly two-thirds of sales last year) is its residential pool business; it specializes in filters, energy-efficient pumps and other gear. But the water company has an industrial and commercial business, too. Pentair provides filtration services to the food-and-beverage market, including brewery, dairy and food businesses. 

Investors in search of value and a stock with room to run should consider Pentair. After the stock tanked by nearly 40% in 2022 due to higher interest rates, inflation, and cooling demand for homes and pools, it is now among the most affordable water stocks, with a P/E of 16. 

"It trades at a pretty reasonable valuation now," says Keith, of Parnassus Funds. That compelling valuation is attracting the attention of investors. Shares have rebounded 30% so far this year. Looking ahead, the company should benefit from the scarcity of homes and new construction to come. 

"Long-term, they're a play on new housing unit growth," says Keith. Income investors will like that Pentair has raised its dividend 47 years in a row. The shares yield 1.5%.

Valmont Industries

• Market value: $6.1 billion
• Dividend yield: 0.8%

Seventy percent of the world's freshwater is used for agriculture. This statistic drives home why Valmont Industries (VMI) , a maker of farm irrigation equipment, is a water stock to watch. Valmont makes precision irrigation systems that optimize water efficiency and maximize crop yields. 

"That has been a tremendous business for them, and it continues to grow," says Bruce Kahn, manager of Shelton Sustainable Equity Fund. Irrigation is in high demand due to long-term challenges of climate change, droughts and population growth. 

Smart water tech is the name of the game in this field. And Valmont Industries' leading pivot-irrigation system (which the company says holds a commanding 43% market share) fits the bill. The pivot sprinkler carefully delivers the right amount of water to crops when they need it, using roughly half the water than more frequently used flood-irrigation systems.  

Last year, Valmont Industries had its best sales year ever. Revenues grew 24.1%, to a record $4.3 billion. And the company is bullish on 2023, thanks in part to a $1.7 billion business backlog. The company rewarded investors earlier this year by boosting the quarterly dividend by 9%. 

Valmont's success has been recognized on Wall Street – investors have pushed shares up nearly 18% in the past year and 36% per annum over the past three years. Investment firm Stifel, which rates the stock a Buy, sees more gains to come. Its $389 price target is 34% higher than the current price. "Valmont clearly has the wind at its back," notes Stifel analyst Nathan Jones. 

Best Water ETFs

The following are some of the best ETFs to buy for investors wanting exposure to an array of water stocks.  

Investors who fear taking too big a gulp from a single water stock are better off sipping from a low-cost exchange-traded fund that offers diversified exposure to dozens of water companies. 

"Why not just own the entire water ecosystem?" asks Rene Reyna, head thematic ETF strategist at fund sponsor Invesco. Below, we've included a list of water-focused funds to consider. All data and returns are through April 30.

Invesco Water Resources ETF (PHO, $53, expense ratio 0.59%). This $1.7 billion fund is the behemoth of the water category. The 36-stock portfolio tracks the Nasdaq OMX U.S. Water index, which includes companies that create products that conserve and purify water for homes, businesses and industrial uses. It's a concentrated fund, with its top five holdings accounting for 41% of assets. Those five are Ecolab; Roper Technologies (ROP), which sells smart meters and remote monitoring; water-tech leader Xylem; water-purification play Danaher (DHR); and Ferguson (FERG), a storm-water and sewage management firm. The ETF's one-year return of 8.5% topped the S&P 500's 2.7%.

First Trust Water ETF (FIW, $82, 0.53%). This well-established fund is the second-largest water ETF. The portfolio of three dozen stocks tracks the ISE Clean Edge Water index, comprising stocks that derive a substantial portion of their revenues from the potable water and wastewater industries. Its top holding is American Water Works (AWK), the nation's largest water utility. The fund spreads its bets around, with its top 10 holdings accounting for about 40% of assets. The ETF's one-year return is 7.6%. 

Invesco S&P Global Water Index ETF (CGW, $50, 0.57%). This ETF tracks the S&P Global Water index and provides exposure to foreign water stocks. Currently, 42% of fund assets are invested in international stocks. Four of the top five holdings are utilities, which make up 39% of the fund. Foreign holdings include U.K. utility Severn Trent (STRNY) and Paris-based wastewater-treatment firm Veolia Environmental Services (VEOEY). The ETF notched a 4.5% return over the past year.

Ecofin Global Water ESG Fund (EBLU, $40, 0.40%). This fund, launched in 2017, is a newer offering with a sustainability focus. It invests in global companies that solve scarcity issues. Holdings must derive at least 50% of revenue from water-industry-related activities and earn high ratings on environmental, social and corporate governance measures. Its top 10 holdings include Ecolab and Essential Utilities. The ETF yields 1.51%; its one-year return is 4.0%.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.