Rising urbanization and an ever-increasing global population make us acutely aware of how indispensable fresh water is. Although it accounts for a scanty 2.5% of the world’s total water content, the capital intensive water utilities are vigorously functioning to supply fresh water to meet every day needs.

But there are challenges far and wide plaguing the water utilities in the U.S. While the Western U.S. is faced with drought conditions in many places flooding is common in the Northeast. And added to this is the ageing infrastructure across the country that needs to be addressed immediately. The most unresolved and underemphasized factor − decaying infrastructure and the related funding gap – is undoubtedly spoiling the bright prospects of this vivacious sector.

The water industry is now under the public glare with reports from the U.S. Environmental Protection Agency ("EPA") showing that an investment of around $384 billion will be required over the next 20 years to modernize and upgrade the old, soiled and decaying U.S. water and wastewater systems.

Is this the Right Time to Invest in Water?

The soft approach of the Federal Reserve to rate hikes may give regulated water utilities a reason to cheer. The Fed kept the short-term interest rate steady in the 0.25–0.50% band and indicated that only two rate hikes are likely for the year. At the end of the Federal Open Market Committee’s meeting, the central bank announced that it now expects the federal funds rate to rise to 0.875% by the end of the year compared with its earlier expectation of 1.375% that took into account four hikes.

The Fed has held itself from raising interest rates again given market jitters as well as a sharp slowdown in China. Resuming rate hikes impulsively could slow growth or rattle investors again. Although the global economy and financial markets may still create a menace, the economy has continued to grow moderately, the Fed said. Moreover, further strengthening in the job market is expected to offset those risks, the Fed said in a statement after a policy meeting.

As a result, utilities as a whole are expected to benefit from a low-rate scenario in the near term, as higher rates would have raised their financing costs and reduced their plea as dividend investments. The sector is a safe bet providing investors with steady returns in an otherwise volatile market.

In fact, the Dow Jones Utility Average index gained 13.97% year to date compared with a 1.02% gain for the Dow and 0.28% growth for the S&P 500. This mostly portrays the Fed's assurance that future interest-rate increases will be gradual.

Fresh Water to Add to your Portfolio

We have handpicked four water utilities that carry a favorable Zacks Rank, which investors might consider adding to their portfolio given the fact that the water industry has rightly held its ground with a current Zacks Rank #25 out of the 258+ industries in our coverage universe.

Based in San Jose, CA, SJW Corp. (SJW - Snapshot Report) through its subsidiaries operates as a water utility company in parts of California and Texas. Its annual dividend of 81 cents a share yields an annualized 2.28% at the current share price and the stock has gained 20.07% so far this year. On Jan 27, this water utility company hiked its annual dividend by 3 cents a share. It has a top Zacks Rank #1 (Strong Buy).

Based in York, PA, The York Water Company (YORW - Snapshot Report) provides drinking water and has wastewater collection and treatment systems. The company registered higher operating revenue as well as net income in 2015 owing to increased water and wastewater rates, as approved by the Pennsylvania Public Utility Commission effective Feb 28, 2014; growth in the customer base, mainly due to acquisitions; as well as an emergency interconnection with a neighboring municipality to provide water.

During the year, it has invested $13.8 million in capital projects for upgrades to its water treatment system as well as other infrastructural programs and has plans to invest approximately $20.1 million in 2016 and $13.1 million in 2017. In 2015, dividends per share rose to 60.40 cents from 57.88 cents in 2014.

The company’s shares have gained 20.09% year to date and it has a Zacks Rank #2 (Buy). Its annual dividend of 62 cents a share yields an annualized 2.08% at the current share price.

Connecticut Water Service, Inc.  (CTWS - Snapshot Report) − a water and wastewater service provider throughout towns in Connecticut and Massachusetts − has a convincing long-term growth strategy backed by strong infrastructure investment. Connecticut Water Service earns nearly 93% of its earnings from regulated operations, which provides ample visibility to its earnings stream. The company is also into acquisitions to expand its customer base and service territories.

In 2015, capital expenditures were $47.8 million, 49% of which was invested in infrastructure replacement. It has a capital spending plan of $65.9 million for 2016.

The company’s shares have gained 13.29% year to date and it has a Zacks Rank #2. Its annual dividend of $1.07 a share yields an annualized 2.48% at the current share price. In Aug 2015, the board of directors approved a nearly 4% increase in the quarterly cash dividend. Connecticut Water Service has increased its dividend payment in each of the last 46 years. This is a testament to the steady performance of this water utility.

Headquartered in Iselin, NJ, Middlesex Water Company (MSEX - Snapshot Report), through its subsidiaries, owns and operates regulated water utility and wastewater systems serving customers in central and southern New Jersey and in the State of Delaware. The company’s top as well as bottom line grew 7.6% and 7.9%, respectively, in 2015. The company has paid cash dividends continually since 1912 and boosted its dividend for the 43rd consecutive year in 2015.

The company’s shares have gained 15.26% year to date and it has a Zacks Rank #2. Its annual dividend of 80 cents a share yields an annualized 2.60% at the current share price.