Andrew Bischof: One utility we really like for its healthy and growing dividend is Duke Energy. Duke has a 4.6% dividend yield, and we think it will grow 4% annually over the next five years. Utilities are down nearly 14% over the past three months and have underperformed the S&P by 19%. One of the key reasons for utility underperformance is that the 10-year Treasury, to which dividend yields are compared as an income proxy, have risen to near 3% during this time, the highest it's been since January 2014. Duke is one of our most attractive names, trading at a 14% discount to our fair value estimate, and its 4.6% yield 100 basis points greater than the industry average. So we think you get both a solid dividend yield and potential for capital appreciation.
The source of Duke's dividend are high-quality regulated utilities with a stable cash flow generating profile. The company's narrow-moat subsidiaries operate in constructive, regulatory environments where we have high confidence that regulators will provide for an appropriate return on investments. Duke operates in Florida, which is experiencing above average customer growth as more and more residents move to the sunshine state. Florida also allows a 10.5% return on equity, well above the national average. Duke also has a large presence in North and South Carolina, which has provided for supportive regulatory treatment and attractive growth opportunities.
We expect Duke's dividend to grow 4% annually, slightly below our 5.5% projected earnings growth rate, as Duke sits at the high end of its targeted 65%-70% range. Supporting that dividend growth is $37 billion of growth capital to be spent over the next five years. These high-quality organic growth opportunities include the typical nut and bolt utility investments. Duke will invest in new natural gas generation, gas pipelines, renewable generation, and grid modernization. The company has consistently earned returns on invested capital above its weighted cost of capital, the hallmark of a strong narrow-moat business.
Additionally, you have what I think is one of the best management teams in the industry running Duke. They have successfully integrated acquisitions, moved the business away from commodity-sensitive markets, and secured above average returns from regulators all while managing expenses well.
To sum it all up, Duke provides an investor an attractive 4.6% dividend yield, significantly above its peer group, and potential for dividend growth. Duke is, in our opinion, a premium regulated utility trading at an unjustified discount to its peer, with what I think is one of the best management teams at the helm.