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Turning Water Into Liquid Assets

NEW YORK ( TheStreet) -- "Water may turn out to be the biggest commodity story of the 21st century," says Edward Kerschner, a consultant to Morgan Stanley.

The idea of water investing got a jump start in the late 1990s when a change in tax law allowed for cities to sign long-term water contracts with private companies. Water "rights" are generally held by state and federal authorities in the U.S. Enron had a strategy to acquire water rights and then provide a market in which to trade them.

Enron failed as a result of massive accounting fraud and never got the idea off the ground. Its most famous water company, Azurix, was broken up and sold off in pieces.

American Water Works (AWK - Get Report) bought a large amount of Azurix's holdings -- an inauspicious beginning to the water investing market.

Fast forward 10 years as cities are getting less money from the federal government to help upgrade their water infrastructure, and the water companies are becoming an accepted solution.

One option is an actual water company that gets hired by a city, like American Water Works. The stock is up 27% for the past year and pays a 3% dividend. This dividend though is in the mid-50% payout range vs. the normal utility payout range of 65%-70%, so the dividend could be increasing. Investors need to be aware that volumes fell in the third quarter, and the company has pending rate cases.

Aqua America (WTR - Get Report) is up 3% for the past year and also pays a 3% dividend. The company is in an investment stage and spending millions on updating systems. As some power customers lost service during hurricanes and freak snow storms, Aqua America made sure its customers didn't lose water.

The company is also getting involved in horizontal drilling for natural gas. Water is needed for the drilling, and Aqua America brings water to the drilling as well as testing the water for safety. "As long as they're drilling, they're going to need water," said Nick DeBenedictis of Aqua America.

If an investor would prefer to diversify his or her water holdings, there are several water-based ETFs to choose from. The PowerShares Water Resources Portfolio (PHO) invests 90% of its assets in ADRs and common stocks that make up the Palisades Water Index. The fund is down 7% for the past year, but the total return is up 8% for the same period. The PowerShares Global Water Portfolio (PIO) is down 11% for the past year, but has a total return of 19% for 2010. Doug Kass suggests the Claymore S&P Global Water ETF (CGW). It is up 1.9% for the past year and tracks the S&P Global Water Index. The index is in two distinct sectors of the water-related business -- water utilities and water equipment and materials. It makes quarterly distributions.

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WTR $27.34 0.00%

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