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Published: October 20, 2009
Not sure how to best judge the dividend safety
of an investment?
Let Standard & Poor's do it for you.
"AAA" credit ratings are hard to come by. The S&P sets the bar
extraordinarily high for its top tier. These are the elite of
the elite. S&P describes the tier saying, "An obligor rated
'AAA' has extremely strong capacity to meet its financial
commitments," a characterization that undersells the financial
world's unrivaled platinum standard.
Just five U.S. companies have earned S&P's highest credit
rating. They are: Payroll company Automatic Data Processing
(Nasdaq: ADP), Warren Buffett's Berkshire Hathaway (NYSE:
BRK-A), ExxonMobil (NYSE: XOM), Johnson & Johnson
(NYSE: JNJ), and Microsoft (Nasdaq: MSFT).
S&P data for the past 28 years show that not one "AAA" company
has defaulted on an obligation.
While these companies' ability to satisfy creditors is stellar,
none of these companies have particularly high yields. Automatic
Data Processing's 3.3% is the biggest of the bunch. Johnson and
Johnson's 3.2% is a close second, but after that, the pickings
are slim. Berkshire Hathaway, in fact, has never paid a dividend
and likely never will.
One category down, to "AA," offers investors many more companies
to choose from. A total of 27 companies have this rating, so
it's still a pretty exclusive club. This rating doesn't seem to
differ too much from the higher AAA category. S&P describes the
AA tier by saying, "An obligor rated 'AA' has very strong
capacity to meet its financial commitments. It differs from the
highest-rated obligors only to a small degree."
In other words, these companies
are really solid, just not quite the
cream of the crop.
Companies in this category rarely
default on loans. S&P data for the
past 28 years show defaults
occurring in just 1999 and 2008.
The yields, however, still leave a
little to be desired. Just two
AA-rated companies yield above 5%.
They're both pharmaceutical
companies: Eli Lilly (NYSE: LLY)
and Bristol Myers Squibb (NYSE:
BMY).
We have to look at companies with a
rating of "A" to find stocks
yielding 6%. S&P says, "An obligor
rated 'A' has strong capacity to
meet its financial commitments but
is somewhat more susceptible to the
adverse effects of changes in
circumstances and economic
conditions than obligors in
higher-rated categories." S&P data
for the past 28 years show defaults
in this category occurring in eight
of those years.
There are 168 companies in this
category, or 1.0% of all U.S.
stocks. Twelve have dividend yields
above 5%, and five stocks yield
above 6%. They are AT&T (NYSE: T),
Verizon (NYSE: VZ), Duke
Energy (NYSE: DUK), Valley
National Bancorp (NYSE: VLY),
and Mercury General (NYSE: MCY).
The largest of the group, AT&T, has
the best growth and earnings
potential. It's the only one in the
group that has grown its earnings
per share over the past year --
+11.3% this year. And it grew
revenue at a quicker rate than the
others.
It also sports the lowest P/E of the
group at 11.6, the lowest P/E
compared to its 5-year average of
17.6, and has the second lowest
forward P/E after Verizon.
AT&T has increased its dividend
+250% since 1984. Over the past five
years, it has grown at the
respectable rate of 7%. Right now it
pays 41 cents quarterly, for $1.64
yearly. Earnings per share for the
past 12 months came to $2.02, which
more than covers the dividend.
You can't find a more solid company
with a 6% yield in the United
States. -- Anthony Haddad
Staff Writer
StreetAuthority |
