4 AAA-Rated Companies With Attractive Yields

Includes: ADP, JNJ, MSFT, XOM
by: Value Investors Portal
Company Price (7/26/11) Dividend Yield Payout Ratio
Automatic Data Processing (NASDAQ:ADP) 53.18 2.70% 56%
Johnson & Johnson (NYSE:JNJ) 65.92 3.40% 44%
Microsoft (NASDAQ:MSFT) 28.08 2.40% 25%
Exxon Mobil (NYSE:XOM) 84.37 2.20% 28%
SPDR S&P 500 (NYSEARCA:SPY) 133.33 1.84% not avail
iShares Barclays 7-10 Yr Treasury (NYSEARCA:IEF) 97.45 2.69% not applic
Click to enlarge
With the loss of the coveted AAA rating by Berkshire Hathaway (NYSE: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.

Cumulative Historic Default Rates
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)

ADP JNJ MSFT XOM SPY IEFClick to enlarge
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.
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.