How To Invest In The Most Important Natural Resource On The Planet

Nathan Slaughter's picture

Thursday, May 9, 2019 - 12:00am

by Nathan Slaughter

What if I told you that the most precious natural resource in the world doesn't trade on any exchange? Nor will you find price quotes for it on any financial website.

Sure, oil and gas are vital for energy and transportation. We need timber and steel for construction, and fertilizer is essential for healthy crop production to meet the world's food needs...

But nothing is more important than water. 


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Every school child knows that most of the earth is covered in water. But while oceans and seas account for 98%, just 2% is drinkable. And of that 2%, less than 1% is readily accessible (most is locked up in frozen polar ice caps).

Abundant though it may seem, fresh water is far scarcer in many places than you might realize.

It's a bit ironic that I'm writing this in the middle of a torrential rainstorm. But the fact is, many of the world's most critical water aquifers, reservoirs and river basins are drying up due to climate change and other factors.

Supply: Dwindling By The Day
In recent years, drought-stricken portions of the Carolinas have been subject to mandatory water restrictions amid sunny skies and searing heat. Florida's Lake Okeechobee became so dry that 12,000 acres of former lakebed caught fire. California was forced to convene a drought summit and declare a state of emergency in nine counties.

We don't typically think of water in terms of supply and demand. But consider Lake Mead, which was created in 1937 by the construction of the Hoover Dam. This reservoir gives life to the thirsty Las Vegas desert. But over the past decade, more water has consistently been withdrawn than deposited -- creating a structural deficit of 1.2 million acre-feet annually.

The reservoir hasn't been full since 1983. Surface level elevations have been dropping by about 12 feet per year (135 feet since 2000) reducing the lake to just 37% of capacity in 2017. That's the lowest level since it was first filled in the 1930s.

Lake Mead's "bathtub ring." The reservoir hasn't been full since 1983.
lake mead 
Source: Mark Henle/The Arizona Republic

Of course, chronic water shortages are by no means limited to the United States.

In Cape Town, South Africa, a key reservoir was depleted to less than 15% of capacity last year. The situation was so dire that officials nearly suspended municipal water service, but managed to avoid a crisis with strict rationing and conservation efforts.

Once the fourth-largest lake in the world, the Aral Sea in Uzbekistan fell victim to irrigation drainage and drought. Five years ago, the eastern lobe completely disappeared. Pictured here is a former fishing fleet.

Aral Sea
Source: RIA News 

Big storms sometimes bring a reprieve, but they don't change the long-range weather forecasts pointing to bone-dry conditions in many parts of the world in the coming decade. According to the United Nations, approximately half the global population will live in regions with severe water stress by 2030.

Demand: 355 Billion Gallons a Day…and Counting
A city like Chicago, with 2.7 million residents, pumps approximately 700 million gallons per day to meet demand. And the global population is expanding by 220,000 people per day -- equivalent to a new Chicago every two weeks.

Much of that population boom is taking place in emerging markets, where 800 million people still lack basic access to clean drinking water. Even in the United States, we rely on thousands of miles of substandard pipes, some of which are a century old and tainted with lead and other contaminants.

Just ask the citizens of Flint, Michigan or Newark, New Jersey.

Incredibly, it has been estimated that the United States loses 6 billion gallons of water a day to leaky, corroded pipes. According to the American Water Works Association, it will take $1 trillion in maintenance and upgrades to bring our dilapidated local water treatment and distribution systems into the 21st century.

Water distribution in the United States is handled by a patchwork of 50,000 rural co-ops and small regional systems. According to the U.S. Geological Survey, intake plants across the country withdraw 355 billion gallons a day nationally for treatment and distribution.

You might be surprised to learn where all this water is going.

Between showers, dishwashers and other household uses, the average person uses roughly 100 gallons a day. But residential needs only account for a small fraction (about 12%) of total consumption. 
Coal mines, paper mills, petrochemical plants and other industrial operations require billions of gallons each year. It takes 39,000 gallons of water to manufacture a car and 62,000 gallons to make a ton of steel. Oil and gas producers routinely use several million gallons to drill and frack a single new well.

But the most intensive water usage is for thermoelectric power and crop irrigation.

It's estimated that more than two-thirds of the world's freshwater is channeled toward agricultural uses. That's not surprising, considering large-scale irrigation equipment covers about 62 million acres of farmland in the United States alone. Given that Mother Nature's rainfall is unpredictable, irrigation often means the difference between withered stalks and healthy fruit and vegetable harvests.

Consider this: it takes roughly 1,000 tons of water to produce just one ton of grain.

As the world's population grows, we are beginning to see a greater strain on existing water supplies. To keep their land arable, farmers have dug millions of irrigation wells and are pumping at rates that are simply unsustainable, which is why groundwater aquifers are being slowly depleted.

Anyone living downstream in the Colorado River Compact can tell you about the political squabbles associated with water allotments. In some parts of the world, these arguments have escalated into full-blown armed conflict.

This Is A Huge Opportunity
We need water for recreation, for electricity, for irrigation, and for residential uses -- and there isn't always enough to go around. Incidentally, that's why some wealthy investors are putting millions directly into water-rights contracts. 

All of this leads to one inescapable conclusion: this water deficit is likely to get worse, not better.

My intent here isn't to scare you with alarming statistics. I just want to call attention to the problem -- to underscore the investment potential associated with the companies that can help fix it. Between the critical need for infrastructure spending and powerful demographic trends, it's easy to see the robust growth potential ahead for companies that specialize in the purification and delivery of clean drinking water.
Xylem (NYSE: XYL), which makes water pumps and filtration equipment, has doubled to $80 per share over the past three years. Roper Technologies (NYSE: ROP), a leader in smart water-metering technology, has gained 32% this year and 100% over the past three years. Idex (NYSE: IEX), which supplies parts and equipment to water treatment plants, has delivered annual gains of 24.3% the past three years, crushing the 5.1% of the average industrial-sector stock.

No wonder water-centric funds like the Invesco Global Water ETF (NYSE: PIO) are at 52-week highs and climbing.

While these are all worthy candidates for further research if you're interested, unfortunately, these stocks aren't exactly synonymous with dividends. Many have little to no yield. But one industry leader has been raising its distributions every year since 2008 -- with $8 billion budgeted to spur future growth and ensure that streak remains intact.

The company supplies water to millions of users and distributes half the profits from all those monthly bills to investors. It connects tens of thousands of new accounts each year, which is why dividends continue to grow.

That makes it an ideal fit for the portfolio at my premium newsletter, The Daily Paycheck. But because we only just added it to the portfolio a few days ago, I can't share the name of it with you today. But if you'd like to learn more and get access to my entire portfolio, go here.

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Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.