With the first interest rate hike in a year out of the way, investors can bet that more are on the horizon. With that in mind, even if the Federal Reserve raises four times over the next two years, the funds rate will still be under 2%. Some of the bond proxy stocks took a hit, and with good reason. Utilities at one point were the best gaining sector in the S&P 500. That’s an anomaly considering their very slow growth.
We decided to screen the Merrill Lynch research universe, looking for stocks that were rated Buy and paid a 7% or higher dividend. We found four that look very attractive, especially for investors either seeking income or total return plays for their portfolio.
This is the largest of the rural local exchange carriers and is expected to continue get a large dose of government money to provide continuing internet service in rural areas. CenturyLink Inc. (NYSE: CTL) is a global communications, hosting, cloud and IT services company enabling millions of customers to transform their businesses through innovative technology solutions.
CenturyLink offers network and data systems management, Big Data analytics and IT consulting, and it operates more than 55 data centers in North America, Europe and Asia. The company provides broadband, voice, video, data and managed services over a robust 250,000-route-mile U.S. fiber network and a 300,000-route-mile international transport network.
Top Wall Street analysts have liked like the stock over the past year as the company transforms itself from a telecom to a technology company. While some have worried over CenturyLink maintaining the dividend, most are positive on the comparisons for the second half of the year and sequential revenue stability.
The company announced last month plans to sell its data centers and colocation business to a consortium led by BC Partners for $2.3 billion, which it will use in part to fund its planned tie-up with Level 3 Communications. Under the terms of the agreement, CenturyLink also will receive a $150 million minority stake in the consortium’s new global secure infrastructure company.
CenturyLink investors are paid a gigantic 9.09% dividend. The Merrill Lynch price target for the stock is $42, while the Wall Street consensus price objective is $28.08. The stock closed trading on Wednesday at $23.77 a share.
Green Plains Partners
This clean energy stock has gained a strong Wall Street following. Green Plains Partners L.P. (NASDAQ: GPP) is an unconventional renewable energy pick, but with a market capitalization just over half a billion dollars and a big dividend yield, this company could be a nice income or growth hold.
The Nebraska-based company specializes in the storage, processing and transportation of ethanol fuel. Ethanol is already a major component of current fuel options. Most retail gasoline contains some ethanol, but there is a push to increase the use of pure ethanol fuel for commercial purposes.
Demand for renewable liquid fuels is expected to grow twofold by 2030, and fourfold by 2040. Green Plains is looking to capitalize on this push and adoption by providing the infrastructure that will underpin the industry as it expands.
Green Plains shareholders are paid an outstanding 9.11% distribution. Merrill Lynch has a $22 price target, and the consensus target is at $22.20. The shares closed most recently at $18.45 apiece.
Golar LNG Partners
This is a liquefied natural gas (LNG) shipping and storage play that holds a big distribution for shareholders. Golar LNG Partners L.P. (NASDAQ: GMLP) owns and operates floating storage regasification units (FSRUs) and LNG carriers under long-term charters in Brazil, the United Arab Emirates, Indonesia and Kuwait. The company also engages in the leasing of its fleets.
The Marshall Islands based company has a fleet of six FSRUs and five LNG carriers, a combined average remaining useful life of 25 years, and an average remaining charter duration of five-plus years. The company posted solid second-quarter results and also was successful in lowering leverage.
The company has a diverse pipeline that includes Golar’s FLNG projects and, as a result, some analysts on Wall Street feel the company has the largest growth potential versus its peer group with potential drop-downs/newbuilding inventories of 16 vessels.
Golar shareholders are paid a massive 10.06% distribution. Merrill Lynch has a $25 price target, while the consensus target is set at $23.19. The shares closed Tuesday at $22.97.
Holly Energy Partners
This stock still is looking to breakout from a late summer sell-off. Holly Energy Partners L.P. (NYSE: HEP) owns and operates petroleum product and crude pipelines, storage tanks, distribution terminals and loading rack facilities.
The company’s pipeline assets include approximately 810 miles of refined product pipelines that transport gasoline, diesel and jet fuel from New Mexico to Texas, Arizona, Utah and northern Mexico; approximately 510 miles of refined product pipelines that transport refined products from Texas to Oklahoma; three 65-mile pipelines that transport intermediate feedstocks and crude oil from Lovington, New Mexico, to Artesia, New Mexico; and approximately 940 miles of crude oil trunk, gathering and connection pipelines located in West Texas, New Mexico and Oklahoma.
The company’s pipeline assets also consists of approximately eight miles of refined product pipelines that support Woods Cross refinery in near Salt Lake City, Utah; gasoline and diesel connecting pipelines located at Tulsa East refinery facility; five intermediate product and gas pipelines between Tulsa east and west refineries; and crude receiving assets located at Cheyenne refinery, as well as 427-mile refined products pipeline.
Holly Energy Partners is known across the sector for being conservative with both its payout and its debt levels. The company’s distribution coverage ratio, which is generally the most common metric for measuring a master limited partnership’s (MLP’s) dividend safety, was 1.67. In an industry where a coverage ratio of 1.2 or greater is outstanding, shareholders are in good shape going forward, as is the company.
Holly shareholders are paid a very solid 7.2% distribution. The Merrill Lynch price target is set at $38, and the consensus target is $37.25. Shares closed Wednesday at $32.50.
Rates are going higher, there is no doubt about it. However, the pace will be slow, and if the economy has any sort of hiccup, you can bet the pace of increases will slow. These stock all make sense for accounts that have some risk tolerance. Also remember that MLP distributions can contain return of capital.