Last year, I reviewed H2O America when the stock was trading below $50 per share. Since then, shares have rebounded, and H2O America now trades above $59.

Today’s dispatch covers American Water Works Company, Inc. ($AWK), one of the few water utilities I haven’t covered before. The company recently raised its dividend by 8.2%, which caught my attention.

After digging deeper, American Water Works looks like a solid income investment with the potential for sustainable, inflation-beating dividend growth over the long-term.

Let’s take a closer look at what the company does and whether it’s worth buying…

American Water Works is the largest regulated water and wastewater utility in the United States. It operates in 14 states and also supplies water to 18 military installations. Roughly 14 million people rely on the company for their daily water needs.

This is a business with more than a century of operating history, tracing its roots back to 1886.

It’s worth noting that the company was acquired in 2003 and later went public again in 2008. This gap affects how its dividend history appears across many stock screeners. While pre-acquisition data is limited, I did find a 1999 Barron’s article confirming that the company paid dividends at that time.

Since re-listing in 2008, American Water has raised its dividend every year, with increases that have generally outpaced inflation.

Over the past five years, the company has delivered a compound annual dividend growth rate of 8.51%. Most recently, management announced an 8.2% increase and stated in its press release: “The company expects to continue its annual dividend growth within a 7 to 9 percent range over the long term, while maintaining a target payout ratio of 55 to 60 percent of earnings.”

This is a company with a clearly stated goal of 7% to 9% annual dividend growth, and a track record to back it up.

From a valuation standpoint, American Water trades at a price to earnings ratio of 21.78 and offers a 2.72% starting yield that is well-covered by a payout ratio of 56.87%. Over the long term, the company has generated a 10-year average annual total return of 8.22%. Somewhat lackluster, and the stock is down more than 14% over the past five years.

Many utility providers are in a similar situation right now, as rising interest rates pushed capital out of defensive sectors like water and electricity and into bonds and Treasury bills.

On top of this, American Water is in the process of acquiring Essential Utilities, Inc. ($WTRG). And mergers and acquisitions often depress share prices until deals are finalized.

See Kimberly-Clark and McCormick for more examples of this phenomenon.

If this were a candy company or software business, I’d be more concerned about its post-2022 performance. But American Water distributes water, an essential commodity that never loses its demand.

With management targeting 7% to 9% annual dividend growth, a safe payout ratio, and a decent starting yield, I’d consider buying American Water Works a defensive, long-term buy-and-hold investment. Using the rule of 72, an 8% growth rate would double an investor’s yield-on-cost in about nine years.

That alone would push yield-on-cost to roughly 5.4% within a decade.

Not bad, especially considering that a decline in interest rates or a shift in sector sentiment could also act as a catalyst for share price appreciation.

The current valuation isn’t a bargain, like H2O America’s PE ratio of 17.41 was last year, but it’s reasonable enough for me to consider buying, especially given the company’s long-term dividend growth outlook.

Late last year, a Klimt sold for the highest price ever paid for modern art at auction.

An outlier sure, but it wasn't a fluke. U.S. auction sales grew 23.1% in 2025. The $1-5mm segment even grew 40.8% YoY.

When the S&P 500 finished its worst quarter since 2022 last month, diversifiers like bonds and bitcoin fell too.

Even with the turnaround in mid-April, analysts at Goldman Sachs and Vanguard have projected low-single-digit annualized returns from 2024-2034.

So, what kind of investment is largely indifferent to the forces driving everything else?

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^{*According to Masterworks data. Investing involves risk. Past performance is not indicative of future returns. See important Reg A disclosures at masterworks.com/cd.}

Disclaimer: This article is for entertainment purposes only. It is not financial advice, always do your own research.