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4 Merrill Lynch Buy-Rated Stocks With Yields Above 7%

Frontier Communications

This rural-local-exchange-carrier really expanded service recently. Frontier Communications Corp. (NASDAQ: FTR) offers broadband, voice, video, wireless Internet data access, data security solutions, bundled offerings — with specialized bundles for residential customers, small businesses and home offices — and advanced business communications for medium and large businesses in 28 states. Frontier’s approximately 17,800 employees are based entirely in the United States.

Wall Street analysts note that Frontier has taken broadband share in almost 80% of operating markets last year. We also recently covered Windstream in depth, another high-yielding communications company the Merrill Lynch analysts are very bullish on and have a Buy rating.

Frontier got final approval in May for an $8.5 billion acquisition of Verizon’s wireline operations that were providing services to residential, commercial and wholesale customers in California, Florida and Texas. The sector-wide overhang is the $8 billion bond deal the company has to complete to fund the purchase. In anticipation, bond investors have widened out the bond at Frontier and across the sector, which has in turn pressured the stock.

The Verizon assets should be accretive and help Frontier grow free cash flow, and they could help the company begin to grow the dividend again. In addition, the government’s CAF-II plan to increase broadband access in rural areas should help boost sales and EBITDA slightly.

Frontier investors a paid an outstanding 7.87% dividend. The $9 Merrill Lynch price target is higher than the consensus target of $6.50. Shares closed on Wednesday at $5.29.

Sabra Healthcare REIT

This top real estate investment trust (REIT) offers solid and dependable income in a growing field. Sabra Healthcare REIT Inc. (NASDAQ: SBRA) owns and invests in real estate properties for the health care industry. Its property portfolio consists of 86 properties comprising 67 skilled nursing facilities; 10 combined skilled nursing, assisted living and independent living facilities; five assisted living facilities; two mental health facilities; one independent living facility; and one continuing care retirement community.

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The company recently announced two investments: the acquisition of a portfolio of five senior housing facilities located in Illinois, and the acquisition of a portfolio of four senior housing facilities located in Oregon and Washington. The transactions were funded with available cash and proceeds from the firm’s revolving credit facility. Merrill Lynch likes the valuations here and thinks that diversifying the portfolio is paying off for the company.

Sabra investors are paid a 7% distribution. The Merrill Lynch price target is $30, and the consensus target is $28.85. The stock closed most recently at $23.33.

Two Harbors

This is one of the battered mortgage REITs and could be a solid value at current levels. We recently covered the sector at some length. Two Harbors Investment Corp. (NYSE: TWO) focuses on investing in, financing and managing residential mortgage-backed securities (RMBS), residential mortgage loans, mortgage servicing rights, commercial real estate debt and related assets, and other financial assets.

The company’s target assets include agency RMBS collateralized by fixed rate mortgage loans, adjustable rate mortgage loans, hybrid mortgage loans, or derivatives; and non-agency RMBS collateralized by prime mortgage loans, Alt-A mortgage loans, pay-option ARM mortgage loans and subprime mortgage loans.

The Merrill Lynch analysts feel that the company is best viewed from a total return perspective, given its complex strategy and operating platform. They also like the strategy of reducing exposure to RMBS, and increasing the capital to the origination platform and other assets.

Investors are paid a monster 11.67% distribution. The Merrill Lynch price target is $11, and consensus target is $10.80. Shares closed Wednesday at $8.86.

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It is important to note that REITs and limited partnerships can distribute income that is return of capital. With that in mind, all these companies rated Buy at Merrill Lynch make sense for accounts seeking higher income that have a higher risk tolerance.