Why Buy Water Utilities When Electric Utilities Are Yielding Double?



Dividend yields of leading US water utilities

Investors have been preferring water utilities for the past few quarters due to their relatively higher dividend yields and stable stock price movements. Water is also a safe and smoothly growing industry. But currently, water utilities are yielding nearly 2%—more or less half the current yield of electric utilities.

But water utilities’ yields have remained largely stable over the years, though American Water Works’ (AWK) yield, in particular, has fallen significantly during the same period.

As seen in the graph above, the dividend yields of water utilities fell in the past couple of quarters. Their strong rally in 2016 could be one of the main reasons behind their falling yields.

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American Water Works (AWK) is currently trading at a yield of 2%. All the other water companies under our analysis also yield about 2%. But AWK has a much higher expected dividend growth, and analysts are expecting its dividends to increase by 8% annually for the next two years. Aqua America (WTR) has an expected dividend growth rate of more than 6% for the next couple of years.

Yields of water utilities versus electric utilities

US electric utilities (VPU) are currently trading at a yield of ~4%. This is nearly double than what water utilities (PIO) and Treasuries (TLT) are yielding. Although both water and electric utilities are slow but stable-growing industries, electric utilities are paying higher dividends, supported by healthy regulatory policies.

In the next part, we’ll have a look at the expected dividend growths of water utilities.


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