Yesterday, I outlined the importance of moats to the world’s most successful companies.

In the real world, these moats are formed by specific competitive advantages. They typically fall into one of these six categories:

1. Low-Cost Provider

If Company A can produce a widget for $2 per unit when everybody else needs $3, it will be able to undercut the competition and maintain stronger margins. That will allow the business to grow and achieve economies of scale, thereby lowering costs even more and reinforcing the advantage.

How do they do it? Well, some manufacturers might have access to cheaper raw materials. Others may have optimized manufacturing processes. Retailers may have bargaining leverage over suppliers or enjoy supply-chain and distribution efficiencies.

There is no better example of this than Walmart (NYSE: WMT). The company buys in huge volumes and extracts favorable terms from vendors. From there, its automated, technology-driven hub-and-spoke distribution network is unrivaled at getting products on the shelves.

Walmart has parlayed the relentless pursuit of lower merchandise costs and operating expenses into the world’s largest retail empire with over half a trillion in annual sales.

2. Network Effect

This advantage takes hold whenever an increase in the size of the user base increases the value of the service to other potential customers. The bigger the platform gets, the harder it becomes for competitors to chip away at it.

Expedia (NSDQ: EXPE) now has more than 3 million hotels, resorts, private homes, and other lodging rentals on its website. And the booking site is visited by 100 million unique monthly visitors seeking a place to stay. Hotel owners want their properties on the platform to reach all those travelers, and travelers flock to the site to peruse the massive selection of available rooms.

The bigger it gets, the bigger it gets.

Another textbook example is the pervasive credit card payment processing networks operated by Visa (NYSE: V) and MasterCard (NYSE: MA). Merchants everywhere accept these cards because millions of consumers hold them. And millions of consumers hold them because they are almost universally accepted.

These leaders have entrenched positions that would be nearly impossible for a competitor to unseat.

3. High Switching Costs

Let’s face it: Most people are lazy. Once we sign up for something, we are reluctant to cancel or switch. Like that gym membership that goes mostly unused.

Switching cereals from Frosted Flakes to Captain Crunch is painless. But whenever there is a cost (i.e., termination fee) or hassle associated with moving from one product or service to another, many customers are inclined to stay put — even if they could get a better deal elsewhere.

Banks are a perfect example. Even if rates are slightly better across the street, most people are unwilling to move all their accounts. Doing so would mean canceling direct payroll deposits, re-establishing automatic bill pay, ordering new debit cards and checks, and possibly transferring brokerage assets.

There are too many headaches.

The strongest switching costs involve business software and equipment that take time and money to implement. Once in place, competitors have a hard time moving in because users don’t want the disruption of installing new systems or the cost of retraining employees to use new machines or software programs.

Think of Autodesk (NSDQ: ADSK), whose computer-aided design (CAD) software is the industry standard and taught in schools everywhere. It’s used by millions of engineers and other professionals in 160 countries to aid in the design of everything from buildings to video games. There is other CAD software available, but considering it takes years to become proficient, clients are reluctant to switch because of the disruption and downtime.

4. Brand-Name Recognition

There is only one McDonald’s (NYSE: MCD), one Nike (NYSE: NKE), one Gucci, and one BMW. And their owners invest tons of cash each year to protect and promote the identity of these valuable names.

Certain brands convey quality and are recognizable around the globe. They help distinguish one product from a sea of generic, commodity-like equivalents — and often command premium prices.

Countless competitors have stood up against Coca-Cola (NYSE: KO) since the beverage was first created in 1886. But thanks to the durable brand name (which is worth nearly $60 billion, according to Forbes), none have managed to steal the crown. Brands are easier bought than built.

Approximately 2 billion servings of Coca-Cola products are consumed around the world each day. Warren Buffett once claimed that if he was given $100 billion to create a new beverage company and take away the soft drink leadership of Coca-Cola, he’d give it back and say it couldn’t be done.

Now that’s a moat.

5. High Barriers to Entry

It’s great to have advantages that can stifle the competition — but it’s even better when potential competitors aren’t even allowed in the game.

If cutthroat competition is the enemy of profits, you’d much rather invest in a tight space with a handful of players than a wide-open field with hundreds or even thousands jockeying for position.

There are typically two types of barriers that scare away would-be entrants. The first is money and/or technical expertise. Anybody can open a pizza restaurant. The capital requirements are modest, and no specialized equipment is needed.

On the other hand, it takes considerable technical expertise and hundreds of millions of dollars to build a modern cruise ship, let alone an entire fleet to compete with Carnival (NYSE: CCL).

And it takes many billions to design, build, and certify a passenger jet. That’s why this market remains a duopoly with only two large-scale players worldwide, Boeing (NYSE: BA) and European rival Airbus. With a massive backlog of 5,600 planes (valued at $520 billion), Boeing has more work than it can handle.

The other type of barrier discouraging competition comes from regulatory obstacles (operating permits, rights of way, etc.). When this happens, state and federal governments are the ones digging the moat and putting up a “keep out” sign.

Some of my favorite examples include highway billboards, trash landfills, railway lines, and regional casinos.

Just ask credit ratings agency Moody’s (one of Buffett’s oldest holdings) about the benefit of having only two or three real competitors thanks to stringent entrance requirements imposed by the SEC to qualify as a “Nationally Recognized Statistical Ratings Organization.”

6. Intangible Assets

Patents and intellectual property are yet another means of legally inhibiting competition — thereby allowing the owners to milk billions in profits.

Pharmaceutical companies are typical beneficiaries, cashing out huge gains from exclusive 20-year sales windows on protected drugs. Many tech companies also make the most of their patents. Qualcomm (NSDQ: QCOM), a former High-Yield Investing holding, has made a mint over the years from licensing rights tied to its groundbreaking CDMA mobile phone technology.

Why I’m Always on the Lookout for Moats

Not all economic moats can be neatly classified. Some don’t exactly fall into any of these boxes, while others might occupy more than one.

Unfortunately, there is no easy way to screen for the existence of a moat. But they do leave behind “fingerprints.” Whenever a business consistently generates superior returns on invested capital (ROIC) that exceed the industry norm year after year, there is usually a good reason why.

Morningstar (perhaps the best provider of such data) has evaluated thousands of public companies and estimates that 40% have no moat at all. About 50% have a narrow moat that might offer some protection for the next 10 years. Only about 10% of its coverage universe (some 150 businesses) is deemed to have a wide moat capable of keeping returns on capital above the cost of capital for the next 20 years.

It’s no surprise that this elite group has outrun the market by a wide margin over the long haul. The Morningstar Wide Moat Focus Index, which includes names such as Pfizer (NYSE: PFE), Disney, and Bank of America (NYSE: BAC), has more than doubled the performance of the S&P 500 over the past two decades.

Source: Morningstar

Without some type of sustainable advantage, the only real question for investors is how long the good times will last before the party winds down. That’s because great business models are always under assault. In fact, it’s not uncommon for shallow moats to get filled in and disappear entirely.

That’s exactly why I’m always on the lookout for innovative companies that can retrench when necessary.

Companies like Corning (NYSE: GLW), which owns 12,000 global patents (including a few for the scratch-resistant Gorilla Glass in your iPhone). Or Las Vegas Sands (NYSE: LVS), which holds one of just two authorized gaming concession licenses in the lucrative Singapore market.

Or Restaurant Brands (NYSE: QSR), which pockets lucrative royalties from thousands of popular Burger King and Popeyes franchises. Or Prudential (NYSE: PRU), which has a crazy negative cost of capital thanks to $30 billion in fresh insurance premiums that roll in each year.

All of these are past or present High-Yield Investing holdings.

Wide-moat companies aren’t always new and exciting. That’s okay — let other investors crow about their latest flash in the pan. I’ll sleep easy at night with dominant businesses that build wealth quarter after quarter, year after year.