3 Water-Company Stocks Making a Splash

BOSTON (TheStreet) -- If ever there were a time for investors to dive into water stocks, this may be it.

The prospect of long-term drought highlights a national crisis in the making at a time when cash-strapped municipalities can't afford to finance improvements of their decaying infrastructures, coupled with huge new demands for water for "hydrofracking" oil drilling.

The three biggest publicly traded water companies are seen benefiting from those themes, which has helped their share prices as they've posted gains ranging from 17% to 23% this year, versus the S&P 500's 11.5% rise. And they provide dividend yields over 2% and minimal downside risk, thanks to their monopoly-like status as a utility and lack of foreign exposure.

But investing in private water utility stocks should be considered a defensive play, given that government regulation tempers growth and profits.

S&P Capital IQ equity analyst Stewart Scharf said in a research note that the U.S. water industry generated revenues of about $136 billion in 2011, up 3% from the previous year, a pace likely to continue this year and that's expected to improve to a rate of about 5% per year over the next two to three years.