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A Growing Dividend Protected by a Narrow Moat

Charles Fishman, CFA

Charles Fishman: Many individual investors have regulated utilities in their portfolios due to the relatively high yields from their usually secure common dividends.

Longtime Morningstar clients typically focus on our moat ratings, but might not think a moat is important for regulated utilities because of their monopoly status. True--they are monopolies and guaranteed all regulated utility business in their territory, but regulators control how much they earn on their assets. 

A very good regulatory framework can result in a wide-moat stock, but these are far and few between in the regulated world due to caps on returns. But a good regulatory framework can result in a narrow moat when the analyst has confidence that the company can earn positive excess returns for at least the next decade with no substantial threat of material value destruction. At the end of March, among the U.S., European, and Latin American utilities we cover, 28 have moat ratings of none, 37 have narrow moat ratings, and only two have wide moat ratings. (A wide or narrow moat rating almost always implies the dividend is secure and many times also growing.)

One narrow-moat utility with an attractive and growing dividend is Duke Energy. Our analyst Andy Bischof believes its common dividend is secure and currently provides a yield over 4%. He expects Duke to grow its common dividend at 4% per year for the foreseeable future. It is currently trading just below our fair value estimate; we believe this is a name investors should keep on their watch list.