Building wealth has gone from “nice to have” to “need to have”.
With prices climbing from inflation and everyday jobs at risk from AI, creating resilience in one’s life is no longer an abstract idea or luxury.
It’s almost a necessity to become independently wealthy.
Fortunately, that’s not as difficult as it might seem.
The long-term investment strategy of dividend growth investing makes it relatively straightforward.
This strategy is all about buying and holding shares in high-quality businesses rewarding shareholders with reliable, rising cash dividends.
You can see what I mean by pulling up the Dividend Champions, Contenders, and Challengers list.
This list has rich data on hundreds of US-listed stocks that have raised dividends each year for at least the last five consecutive years.
Once one has enough dividend income to cover their expenses, they’re financially independent.
Even having enough dividend income to offset a large chunk of one’s bills makes that life much easier and more resilient.
I say this from personal experience, as I’ve employed the dividend growth investing strategy for more than 15 years now, allowing it to help me as I went about building wealth and financial independence.
This resulted in the FIRE Fund.
That’s my real-money portfolio generating enough five-figure passive dividend income for me to live off of.
I was able to achieve financial independence and even retire in my early 30s.
Now, there’s more to all of this than selecting the right businesses for long-term investment.
There’s also the matter of investing at the right valuations.
Whereas price is what you pay, it’s value that you ultimately get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
Prospective investment income is boosted by the higher yield.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
Building financial independence is practically a necessity these days, and routinely acquiring undervalued high-quality dividend growth stocks is a fantastic method toward achieving that end.
Of course, being able to spot undervaluation first requires one to have a valuation framework in place.
Well, that’s where Lesson 11: Valuation comes in.
Written by fellow contributor Dave Van Knapp, it lays out what valuation is all about, how to understand it, and how to apply simple tools in order to spot possible undervaluation.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
DTE Energy Co. (DTE)
DTE Energy Co. (DTE) is an American electricity and gas utility company.
Founded in 1849, DTE Energy is now a $25 billion (by market cap) diversified energy player employing nearly 10,000 people.
DTE Energy provides approximately 2.3 million customers in the state of Michigan with electricity utility services; it provides approximately 1.3 million customers with gas utility services.
DTE Energy provides its services to retail, commercial, and industrial customers.
Its generating capacity approximates out to 34% coal, 32% gas, 15% renewables, 9% nuclear, and 9% hydroelectric.
As a power utility company, DTE Energy has many appealing characteristics for long-term investment.
These characteristics include resiliency, reliability, and visibility.
It ultimately comes down to a simple fact: DTE Energy’s customers cannot viably live without the services it’s providing.
In a modern-day society, living without power is practically impossible.
And since every local territory within the US almost always has only one local utility provider, these beholden customers are completely reliant upon just that one company.
There’s nowhere else to go.
That’s about as “sticky” as businesses gets.
The revenue can’t get any more recurrent than this.
However, there’s an important counterpoint to be aware of.
Because of how much leverage any local utility company has over the local populace, regulators heavily regulate these companies and put a ceiling on how much profit they can make.
On the other hand, there’s also a profit floor in place, as utility companies are essentially guaranteed (by those same regulatory bodies) reasonable returns on investments (by scaling up rates).
Combined with the necessary nature of power, this regulator-supported base supports consistent growth across revenue, profit, and the dividend.
Dividend Growth, Growth Rate, Payout Ratio and Yield
DTE Energy has already increased its dividend for 17 consecutive years.
Its 10-year dividend growth rate of 7.4% is at the higher end of what a power utility can typically produce, so this is quite impressive and indicates a favorable geography and regulatory framework.
This high-single-digit dividend growth is layered on top of the stock’s market-smashing 3.9% yield.
While this stock often offers a nice yield, the yield is especially nice right now and 70 basis points higher than its own five-year average.
A payout ratio of 65% reveals no obvious issues with the health of the dividend.
This strikes me as one of the best dividend profiles in the entire utility space, as it’s an above-average yield and an above-average dividend growth rate.
There’s no trade-off to be made on either side of the coin, which is fantastic.
Revenue and Earnings Growth
As fantastic as it may be, though, we’re mostly relying on past information.
However, investors must constantly be anticipating future information, as the capital of today gets risked for the rewards of tomorrow.
Thus, I’ll now build out a forward-looking growth trajectory for the business, which will be highly useful when the time comes to estimate intrinsic value.
I’ll first show you what the business has done over the last ten years in terms of its top-line and bottom-line growth.
I’ll then reveal a professional prognostication for near-term profit growth.
Blending the proven past with a future forecast in this way should give us the confidence to roughly judge where the business could be going from here.
DTE Energy advanced its revenue from $10.6 billion in FY 2016 to $15.8 billion in FY 2025.
That’s a compound annual growth rate of 4.5%.
Really good top-line growth for the business model.
Earnings per share rose from $4.83 to $7.03 over this period, which is a CAGR of 4.3%.
In my view, this understates DTE Energy’s true path of growth, as FY 2025 operating earnings were quite a bit higher than GAAP earnings due to mark-to-mark adjustments and discontinued operations.
If we back things up just one year and look at that 10-year record between 2015 and 2024, DTE Energy’s EPS CAGR jumps to nearly 6%.
Looking forward, CFRA believes that DTE Energy will deliver high-single-digit EPS growth over the near term.
CFRA’s forecast for FY 2027 operating earnings per share is $8.42, which implies a 7% CAGR off of a $7.36 FY 2025 base.
I think that’s a realistic take on what DTE Energy can do over the near term.
CFRA notes DTE Energy has a constructive regulatory environment, which bodes well for the company’s $36.5 billion five-year investment plan.
CFRA also highlights that DTE Energy has secured agreements with major hyperscalers to provide data center power under multidecade terms, with favorable structures for both the utility and the local consumers.
Counterparty risk is minimal (these are some of the biggest and most solvent companies in the world), shovels are in the ground, and demand is clear.
This is incremental new business on top of DTE Energy’s core operations.
Seeing as how the long-term track record was quite strong before any of these huge data center buildouts, the future looks quite bright.
If DTE Energy can put up 7% or so EPS growth, that sets the dividend up for a similar growth track.
That’s pretty much right in line with what DTE Energy has done over the last decade, so it looks like business as usual.
When you pair that with the near-4% yield, that puts the pieces in place for a 10%+ annualized total return out of a stable, defensive power utility.
It’s really not bad at all.
Financial Position
Moving over to the balance sheet, DTE Energy has a decent financial position.
The long-term debt/equity ratio is 1.9, while the interest coverage ratio is slightly over 2.
Long-term debt has more than doubled over the prior decade, which isn’t totally surprising; regulated power utilities rely on equity and debt in order to fund growth projects (which, as noted earlier, get regulator-supported returns on investment).
With a power utility, you tend to see growth across revenue, profit, dividends, and debt loads.
It’s just part of the business model.
DTE Energy does command investment-grade credit ratings: BBB, Fitch, BBB+, S&P.
This is one of the weaker balance sheets I’ve seen in the space, but it’s not catastrophic.
Profitability, on the other hand, is relatively robust.
Return on equity has averaged 11.4% over the last five years, while net margin has averaged 8.5%.
DTE Energy’s ROE is quite strong, speaking on the favorability of the regulatory environment (which is something CFRA touched on).
Overall, DTE Energy is just a solid American power utility business.
And with economies of scale, a geographic monopoly over its territory, beholden customers, and a regulatory framework that just about guarantees some level of profit, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Litigation, regulation, and competition are omnipresent risks in every industry.
Regulation is a double-edged sword: Regulators allow for utilities to make a reasonable profit, where profit scales with costs, putting a profit floor in place; however, because electricity is a basic necessity and there’s often only one power provider in any one geographic area, regulators put a profit ceiling in place by limiting the rates a utility can charge.
This is a rare industry in which competition at a local level doesn’t exist, as DTE Energy has a monopoly across its territory, but it’s possible that customers will become future competitors by generating power at the site of consumption (through solar installations).
DTE Energy is dependent on the evolving regulatory structure and population growth of Michigan, but Michigan’s current regulatory situation is constructive.
The company has exposure to nuclear and the risks therein.
There is limited natural disaster risk present, although Michigan does suffer through occasional blizzards and tornadoes.
The balance sheet is stretched, but this is offset by highly steady and visible revenue.
These risks seem pretty standard for a power utility.
But after a recent 20%+ drawdown, the stock appears to have a valuation that is surely better than standard…
Valuation
The P/E ratio has compressed to 19.3.
That’s below the five-year average P/E ratio of 20.3.
The cash flow multiple of 7.5 is also noticeably lower than its five-year average of 8.2.
And the yield, as noted earlier, is significantly higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a dividend discount model analysis.
I factored in a 10% discount rate and a long-term dividend growth rate of 7%.
I’m basically extrapolating out the 10-year dividend growth rate that DTE Energy has already proven out.
The company has clearly demonstrated an ability to deliver that kind of dividend growth for an extended period.
Moreover, the near-term expectation for EPS growth is right at 7%, so the stars are aligning and pushing toward that number.
The DDM analysis gives me a fair value of $166.21.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
I think the recent rate-driven drawdown has punished this stock too much and created an attractive entry point.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates DTE as a 5-star stock, with a fair value estimate of $157.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates DTE as a 4-star “BUY”, with a 12-month target price of $168.00.
We’re all in broad agreement here. Averaging the three numbers out gives us a final valuation of $163.74, which would indicate the stock is possibly 25% undervalued.
Bottom line: DTE Energy Co. (DTE) is a great power utility business. It has a monopolistic hold over captive customers who literally cannot live without what it provides. Plus, data centers are adding a new source of demand. With a market-smashing yield, high-single-digit dividend growth, a reasonable payout ratio, more than 15 consecutive years of dividend increases, and the potential that shares are 25% undervalued, long-term dividend growth investors interested in upping their utility exposure should take a close look at this name right now.
-Jason Fieber
Note from D&I: How safe is DTE‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 90. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, DTE’s dividend appears Very Safe with an unlikely risk of being cut. Learn more about Dividend Safety Scores here.
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Disclosure: I have no position in DTE.
