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The water business is a highly profitable one with growth opportunities, making it appealing for dividend growth investors. People always need clean water, regardless of the state of the economy. In turn, many top water stocks have regular customer bases and very consistent revenues and earnings.

This great stability paves the way for water stocks to pay growing dividends to shareholders. In fact, many water stocks have extremely long histories of increasing dividends. Some have even reached Dividend Aristocrat status, which means they have raised dividends for at least 25 consecutive years.

This article will discuss 3 top dividend-paying water stocks.

Water Stock: A.O. Smith (AOS)

A.O. Smith is a leading manufacturer of residential and commercial water heaters, boilers, and water treatment products. A.O. Smith generates the majority of its sales in North America, with the remainder from the rest of the world. It has category-leading brands across its various geographic markets. The company is on the Dividend Aristocrats list.

A.O. Smith reported its first-quarter earnings results on April 28. The company generated revenues of $970 million during the quarter, which represents a decline of 1% compared to the prior year’s quarter. A.O. Smith’s revenues were up slightly in North America, while revenues saw a decline in the rest of the world, with currency rate movements explaining some of that downward move in international markets. A.O. Smith generated earnings-per-share of $0.94 during the first quarter, which was up 22% on a year-over-year basis.

A.O. Smith has updated its guidance for 2023. The company is now forecasting earnings-per-share in a range of $3.30 to $3.50, which reflects that management expects earnings-per-share to grow meaningfully this year. At the midpoint of the guidance range, A.O. Smith’s earnings-per-share would be up 8%.

Thanks to a healthy housing market in the U.S., the company has enjoyed consistent growth in the domestic market throughout most of the last decade. A.O. Smith’s sales performance was even more impressive in China, where sales have grown by ~20% per year on average during the last decade. China’s huge population, its robust GDP growth, and the booming of its middle class are major tailwinds in this important market. In addition, thanks to the severe pollution of the country, the demand for air purifiers should remain strong as well.

Water Stock: Pentair plc (PNR)

Pentair operates as a pure–play water solutions company with 3 segments: Aquatic Systems, Filtration Solutions, and Flow Technologies. Pentair was founded in 1966 and has increased its dividend for more than 40 years in a row, when adjusted for spin–offs.

Pentair reported its first quarter earnings results on April 26. The company was able to generate revenues of $1.03 billion during the quarter, which was 3% more than the company’s revenues during the previous year’s quarter, a result that beat estimates easily. Core sales, which excludes the impact of currency rate movements, acquisitions, and dispossessions, were down 3% year over year, which was weaker than the average core revenue growth rate over the last couple of quarters, during which Pentair reported a core sales increase. Pentair recorded earnings-per-share of $0.91 for the first quarter, which was up 7% year-over-year. Pentair’s earnings-per-share beat the analyst consensus by a sizeable $0.14.

PNR has a projected dividend payout ratio of approximately 25% for 2023. The payout ratio is not very high, which makes us believe that the dividend looks quite safe. Even an earnings decline such as the one during the last financial crisis would most likely not result in a dividend cut.

Water Stock: American States Water (AWK)

American States Water is a utility company with two business units: Utilities (primarily water, some electricity) and Services (wastewater services on several US military bases). American States Water is based in California, where it operates its utilities business. The company’s services unit spans several US states.

On April 27th, 2023, American Water Works increased its dividend by 8% to a quarterly rate of $0.7075. American States Water is a Dividend King, which means it has 50+ years of rising dividends.

First-quarter revenues rose by 11.4% year-over-year to $938 million. The increase was primarily a result of authorized revenue increases from completed general rate cases and infrastructure proceedings for the recovery of incremental capital and acquisition investments. EPS came in at $0.91 compared to $0.87 last year, driven by a 7.8% increase.

Future growth will be driven by price increases and customer acquisitions. The company invested $538 million in its infrastructure during the quarter, adding 4,000 customer connections through closed acquisitions and organic growth. The company now has general rate cases in progress in three jurisdictions and filed for infrastructure surcharges in two jurisdictions, reflecting a total annualized revenue request of approximately $144 million.

Recession resilience, the moderate payout ratio, and the strong dividend growth track record mean that American States Water’s dividend is very safe. Utilities are not cyclical, and due to the decades-long contract durations with the US military, the services business is not cyclical either. American States Water is therefore quite recession-proof.

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