4 AAA-Rated Companies With Attractive Yields

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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
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 IEF
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.
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.