The Safest 6%-Plus Yielding Stock in America

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.