Water Utility Stocks: Low Beta and High Dividend Yields

01/07/2016 9:00 am EST

Focus: STOCKS

Matt McCall

Founder and President, Penn Financial Group

A sector that meets the criteria of low beta and high dividend yields—two characteristics investors are seeking given the shaky start to 2016—are the water utility stocks, so Matt McCall, of Penn Financial Group, highlights four individual stock names for investors to consider.

After a rough start to 2016 there are two characteristics that investors are searching for in new investments: stability and income. Stability could be quantified by the beta of a stock versus the overall market. Income is measured by the dividend yield. A sector that meets the criteria of low beta and high dividend yields are the water utility stocks.

The ETFs that track the water sector have often been a favorite of the retail investor, however, they have struggled over the last year. The reason for their underperformance has been the exposure to the industrial stocks in the water industry. The diversity is beneficial during certain market environments. Today, the water utilities offer the most attractive investment opportunity of the group and therefore investors must concentrate on individual stocks.

The water utility sector is small when compared to its peers and there is not a large number of stocks to choose from in the US. The largest company in the space (double the size of the next closest competitor) is American Water Works (AWR). The $10.8 billion company is trading just below its all time high and pays a dividend yield of 2.3%. The beta is a low 0.35.

There are also micro-cap stocks in the sector that look just as attractive as AWR and pay higher dividend yields. Connecticut Water Service (CTWS) is a $429 million market cap water utility in the Northeast that pays a 2.8% dividend yield and trades with a beta of 0.21.

Middlesex Water (MSEX) is a $426 million market cap water utility with customers in New Jersey, Pennsylvania, and Delaware. The beta is slightly higher at 0.56, as is the dividend yield of 3.0%. Technically the stock has a similar chart to the first two stocks as it sits not far from an all-time high.

Artesian Resources (ARTNA) is a $238 million market cap water utility with services in Delaware, Maryland, and Pennsylvania. The dividend yield is 3.2% and the beta is a very low 0.09 versus the overall stock market. The stock is almost identical to MSEX, as it sits a couple weeks off an all-time high.

The one factor that could hurt the water utility stocks is higher interest rates. That being said, even after the Fed raised the Fed Funds rate for the first time last month it was not enough to push Treasury yields higher.

Matt McCall, Founder and President, Penn Financial Group

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