Merrill Lynch Gets Nervous: Buy Only High-Quality Stocks Now

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It’s probably no surprise that some on Wall Street are starting to lose their bullish bias. After a huge run off the lows in 2009, the market has tread water this year, and with the sell-off that started in August factored in, all of the major indexes are down for the year despite the recent big rallies.

In a new report from Merrill Lynch and the firm’s highly regarded strategist Savita Subramanian, not only is the year-end target for the S&P 500 significantly lowered, they also deliver a pretty somber overall picture for investors. While not calling for any huge bear market reversal, they do stress one big point to investors: buy quality for now.

We screened the Merrill Lynch research universe and found five high-quality stocks that all pay an outstanding dividend.

AT&T

This company posted solid second-quarter numbers, and many on Wall Street think the third quarter will be good as well. AT&T Inc. (NYSE: T) has to be one of the most ignored dividend plays on Wall Street. In fact, it is the third most underweighted security, and the most under-owned by active fund managers, according to Merrill Lynch. While growth has been admittedly slower over the past few years, the company continues to expand its user base, and strong product introductions from smartphone vendors have not only driven traffic, but increased device financing plans, an area that many on Wall Street believe could lead to some earnings weakness.

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Late last month the company reiterated 2015 guidance for double-digit revenue growth and continued consolidated margin expansion. Management expects capital spending to increase sequentially and they also estimate that free cash flow could be better than $4.5 billion. Third-quarter wireless subscriber additions are also expected to come in slightly higher than the Merrill Lynch estimates.

AT&T investors are paid an outstanding 5.76% dividend. The Merrill Lynch price target for the stock is $40, and the Thomson/First Call consensus estimate is $37. Shares closed Monday at $33.43.

Altria

The maker of tobacco products and wine has posted very solid numbers through the first half of the year, and the third quarter is looking good as well. Altria Group Inc. (NYSE: MO) is a top mega-cap consumer discretionary stock to buy on Wall Street, and the company’s Marlboro brand remains one of the most recognizable in the world.

Many Wall Street analysts concede that the stock has solid downside support owing to the generous dividend yield, which remains at a huge premium in relation to the 10-year Treasury. Cash flow generation and the return of cash to Altria shareholders remain key facets of its total shareholder return, and analysts expect support of the strong dividend, which they believe will continue to climb, and strong share repurchase activity. And Altria recently reaffirmed its full-year adjusted earnings outlook.

Altria investors are paid an outstanding 4.06% dividend. Merrill Lynch has a $59 price target. The consensus target is $59.50. The stock closed on Monday at $55.73.

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