| Company | Price (7/26/11) | Dividend Yield | Payout Ratio |
|---|---|---|---|
| Automatic Data Processing (ADP) | 53.18 | 2.70% | 56% |
| Johnson & Johnson (JNJ) | 65.92 | 3.40% | 44% |
| Microsoft (MSFT) | 28.08 | 2.40% | 25% |
| Exxon Mobil (XOM) | 84.37 | 2.20% | 28% |
| SPDR S&P 500 (SPY) | 133.33 | 1.84% | not avail |
| iShares Barclays 7-10 Yr Treasury (IEF) | 97.45 | 2.69% | not applic |
With the loss of the coveted AAA rating by Berkshire Hathaway (BRK.A) after the consummation of the BNSF Railway acquisition, there are now only four companies left in the S&P 500 with the top credit rating. AAA credit worthiness is regarded by the three bond credit agencies [Moody’s, Standard & Poor’s (S&P), and Fitch] as having the extreme strong capacity to meet financial commitments. As we can see from table below, there is a less than 0.70% chance of default on AAA bonds.
Source: Municipal Bond Fairness Act (HR 6308)
As of April 2011, there were four companies rated AAA by S&P: Automatic Data Processing (ADP), Johnson & Johnson (JNJ), Microsoft (MSFT), and Exxon Mobil (XOM). The AAA rating is a virtual guarantee of credit worthiness for corporate bondholders. One tier down would be the equity owned by common shareholders. Shareholders in AAA companies today are earning a higher dividend yield than the S&P 500 Index ETF (SPY). Moreover, the average 2.68% dividend yield on the AAA companies is competitive with the average 2.69% yield on the 7-10 Year Treasury ETF (IEF).
Over the past 52-weeks, all four AAA companies have outperformed IEF and two of four (ADP, XOM) have outperformed SPY. (See chart below, click to enlarge)
Conclusion
With a 50/50 chance of the United States losing its coveted AAA rating, investors might consider rebalancing a portion of their portfolio by reducing US Treasuries in favor of AAA companies given the risk/reward benefits of a competitive yield and the potential for capital appreciation and dividend payout increases.
Conservative income investors might consider the AAA companies’ corporate bonds.
Disclosure: I am long SPY, MSFT.
Disclosure: I am long SPY, MSFT.
Disclaimer: Before deciding to invest you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should seek advice from an independent financial advisor if you have any doubts.
