Wednesday, July 20, 2011

Four Dividend Stocks safer than US Treasuries

Over the past few weeks, financial markets have gotten concerned about the possibility that US congress would not raise the debt ceiling on US government debt. The implications range from credit downgrades on US Treasuries to de facto default by the US government if it chooses to delay payment of Social Security Benefits. Currently, US Treasuries are rated AAA, and are regarded as the safest investment instrument in the world. As a result, institutions and foreign governments hold trillions of dollars of this highly liquid and safe investment. The high budget deficits as well as the high level of US government debt however, have some experts doubting whether the status quo of US Treasuries as “safe investments” will change.

So if investors doubt the safety of an instrument rated AAA by credit agencies, what alternatives do investors looking for AAA safe investments currently have? I did a little research and found several dividend growth stocks, which have global operations that currently spot AAA ratings.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company is a member of the dividend aristocrats index, and has increased dividends for 49 years in a row. Over the past decade, Johnson & Johnson has raised annual distributions at 13% per year. Yield: 3.40% (analysis)

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. This dividend aristocrat has increased dividends for 29 years in a row. Over the past decade, Exxon Mobil has raised annual distributions at 7.10% per year. Yield: 2.30% (analysis)

Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers worldwide. The company is a member of the dividend aristocrats index, and has increased dividends for 36 years in a row. Over the past decade, ADP has raised annual distributions at 14.50% per year. Yield: 2.70% (analysis)

Microsoft Corporation (MSFT) develops, manufactures, licenses, and supports a range of software products and services for various computing devices worldwide. The company has increased dividends for 6 years in a row. Over the past five years, Microsoft has raised annual distributions at 11.40% per year. Yield: 2.40% (analysis)

Generally, purchasing the stock of any of these four companies would likely provide investors with greater total returns over the next 5, 10 or 30 years. In addition, three of these companies have a history of growing dividends for several decades. As a result, investors in these companies can expect a rising dividend income stream, that would exceed inflation over time.

Full Disclosure: Long JNJ, ADP, XOM

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  1. Great post! MSFT is the only one that hasn't been paying dividends for decades and decades, which is why I won't invest in it just yet. There are lots of other opportunities with solid long-term track records.

  2. More precisely, the bonds of these companies are arguably safer than US treasuries, not necessarily the stocks. The credit rating applies to the bonds. The chance of, say, JNJ being a bad investment, although rather low, is higher than the chance that JNJ will be such a bad investment that it defaults on its debt. One could argue that the bonds face inflation risk that the stock does not have, though.

    Regardless, all of these names are extremely solid, and all four of them would make good long term investments in my opinion. I'm long JNJ and XOM. ADP and MSFT are not in my portfolio due to me wanting to keep my number of positions under 20, but they both would be good fits.


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