AAA companies in the S&P500 index are now numbered at just 4 following the rating downgrade of Berkshire Hathaway earlier in the year. Amazingly, these companies and dozens of sovereigns are now rated higher than US Treasury Bonds following Fitch’s downgrade of US debt:
It’s been interesting over the years to see companies losing their AAA rating while I can’t recall seeing a company added to the ranks. I guess it’s just a sign of the times. The AAA rating is important because it’s as close as you can get to a virtual guarantee of creditworthiness for corporate bond investments. One tier down would be the equity side. By owning shares in AAA companies that are offering reasonable dividends, in the case of the remaining 4, you could actually realize a higher dividend yield than you can get on Treasuries while participating in capital appreciation and dividend payout increases. When you own a corporate bond, you get the coupon payment and unless you bought at a significant discount (like buying Ford during the Financial meltdown, etc.), that coupon payment is it. In fact, over long periods of time, with inflation and interest rate hikes to boot, holding an individual corporate bond during such a prolonged period could make those current yields look rather paltry.
Remaining AAA Companies with Dividend Yield:
Automatic Data Processing (ADP): 3.3%
Exxon Mobil (XOM): 2.9%
Johnson & Johnson (JNJ): 3.7%
Microsoft (MSFT): 2.1%
Average Dividend Yield: 3.0%
The average 3.0% dividend yield on these companies actually looks surprisingly robust in comparison to savings accounts approaching zero and Treasury yields at about 2% for a 5 year note and 3.2% on the 10 year. Bear in mind that during times of crisis, companies do cut their dividend whereas a corporate bondholder is higher in the food chain during a liquidation or other circumstances, whereas equity investors take a haircut and calls for dividend cuts are becoming rather routine as we saw during the past year when Financials receiving TARP funds had to cut theirs and now there are many calling for BP to cut their dividend.
Personally, I don’t own any of these stocks directly (here’s Darwin’s Portfolio), but if I were building a long-term income portfolio, I might consider an approach such as this over Treasuries given the benefits compared to the limited upside for Treasuries aside from the yield.