• Water stocks are attractive to income investors.
• American Water Works (AWK): American Water Works has a significant scale advantage.
• California Water Service Group (CWT): California Water Service Group is one of the three largest water utilities in the U.S.
• SJW Group (SJW): SJW Group engages in a full suite of water services.

Water stocks possess all the qualities one would wish for when it comes to long-term dividend growth.

Investors seeking long-term, secure dividend growth would do well to carefully select sectors of the market before picking individual stocks to ultimately purchase. There are many factors that determine how safe a company’s dividend payment is, with sector playing a big role in terms of competition, long-term demand, recession resistance and other critical factors.

In this article, we’ll take a look at why dividend growth investors would want to own water stocks, as well as three examples of companies we like today in the sector.

Water is essential not only to all human life, but in manufacturing, irrigation, and countless other applications. Not only is water essential, but clean water is absolutely essential. That opens up the universe of water-related stocks to those that provide things like pumping and transportation equipment, filtering, storage, heating and cooling, and of course, the physical delivery of water itself.

Below, we’ll focus on three examples of companies that focus on the physical delivery of water. That is, three water utility companies.

Water utilities tend to exhibit many of the same characteristics as electric utilities, for instance; stable long-term demand, monopolies in their service areas, built-in pricing increases, and recouping of capital expenditures from customers. These characteristics make water utility stocks strong dividend growth candidates, and the three companies below have these and more.

Water Stocks: American Water Works  (AWK)

Our first stock is American Water Works (NYSE:AWK), a water and wastewater services company based in New Jersey. The company offers water and wastewater services to 1,700 communities in 14 states, serving about 3.4 million customers. Among utilities, that gives American Water Works a big scale advantage. Its customers include residential, industrial, food and beverage, property developers, energy suppliers, fire services and much more.

The company was founded in 1886, generates about $3.8 billion in annual revenue, and trades with a market capitalization of $26 billion.

American Water Works has only paid dividends to shareholders for 14 consecutive years, which is somewhat on the lower end of the scale when it comes to utilities. However, the company has raised its dividend by an average of nearly 9% annually over that 14-year period, so as a pure dividend growth stock, it definitely hits the mark.

The current yield is 1.8%, so it’s about better than the S&P 500, and the payout ratio is right at 60% of earnings. With the company’s reliable earnings stream, that’s a perfectly acceptable payout ratio. Further, we expect robust 8% earnings-per-share growth in the years to come, meaning the company could raise its payout by 8% annually without increasing the payout ratio. For that reason, we believe this stock has many years of strong dividend growth in front of it.

California Water Service Group (CWT)

Our next stock is California Water Service Group (NYSE:CWT), a water utility based in California. The company provides water and related services to customers in California, Washington, New Mexico, Hawaii and Texas. Its customer base includes about 550,000 total connections, with the vast majority of those in California. That makes California water one of the three largest water utilities in the U.S.

California Water was founded in 1926, generates about $835 million in annual revenue, and trades with a market capitalization of $2.7 billion.

California Water’s dividend increase streak stands at an immensely impressive 54 years, making it a Dividend King. That puts the stock in very rare company in terms of dividend longevity, and is certainly one of the reasons we like it.

In addition, the average increase in the payout for the past decade is about 5%, so management is handily beating inflation with dividend increases. The current yield is 1.9%, so again, meaningfully better than the broader market. And California Water’s payout ratio is just 50% of earnings for this year.

Given the stable nature of its earnings, as well as 5% projected average annual growth, we see the dividend growth runway as very long for this stock. We are forecasting, 6% average annual growth in the dividend over the next five years, making California Water a strong dividend growth stock.

SJW Group (SJW)

Our final stock is SJW Group (NYSE:SJW), a water utility provider based in California. The company engages in a full suite of water services, including production, purchase, storage, purification, distribution, and selling of water and wastewater services. Its service area includes California, Connecticut, Maine, and Texas following its merger with the former Connecticut Water.

SJW has about 400,000 total connections, so its scale is quite large as well. It produces $645 million in annual revenue, and trades with a current market capitalization of $1.8 billion.

SJW’s dividend increase streak is 54 years, making it a Dividend King. In addition, its average annual increase over the past decade is more than 7%, so on a pure dividend growth basis, SJW receives high marks.

Its current yield is 2.4%, almost a full percentage point better than the S&P 500. Like the others on this list, its payout ratio is also quite reasonable at 61% of earnings for this year. That makes the dividend not only safe, but with lots of room to grow in the future.

Taking into account forecasted earnings growth of almost 8% annually, we see the potential for future dividend increases as vast for SJW, without undue stress on its ability to pay.

Final Thoughts

Water stocks have many characteristics that make them great dividend stocks. They have stable demand from a captive customer group, have built-in pricing increases from regulators that virtually ensure growing profitability over time, and they have shareholder-friendly management groups that prioritize returning capital to shareholders.

In addition, water stocks are inherently recession resistant, so they can have a diversifying impact on an investor’s portfolio.

The three stocks we’ve highlighted here – American Water Works, California Water and SJW – all have strong dividend growth histories, market-beating yields, relatively low payout ratios and strong growth prospects. Combined, these factors make these stocks great dividend growth stocks for long-term investors.

On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.