One of the best things about the Federal Reserve finally lifting interest rates for the first time in years is that the pall that has hung over the stock market, and especially dividend yielding stocks, which underperformed this year, has finally been lifted somewhat. If there is one thing the market can’t stand, it’s uncertainty.
A recent Merrill Lynch report says the tact for 2016 is to focus on companies with sustainable dividends, as investors and the market are very unforgiving to companies that cut dividends. The High Quality and Dividend Yield Portfolio stocks have outperformed the S&P 500 since inception. On average, they have a higher return on equity, lower debt-to-equity and a higher yield than the S&P 500 benchmarks.
We found four that make great portfolio additions for 2016, as they have serious upside potential and are rated Buy at Merrill Lynch
This conservative information technology company makes the list. Automatic Data Processing Inc. (NASDAQ: ADP) is one of the world’s largest providers of business outsourcing and human capital management solutions. It offers a wide range of human resource, payroll, talent management, tax and benefits administration solutions from a single source, and it helps clients comply with regulatory and legislative changes, such as the Affordable Care Act (ACA).
The company posed very solid fiscal first-quarter earnings that beat consensus estimates, and guidance for the balance of fiscal year were posted in the 12% to 14% range. With the economy poised to strengthen, this is a solid stock to buy for 2016.
ADP investors receive a 2.35% dividend. The Merrill Lynch price target for the stock is $95. The Thomson/First call consensus price target is lower at $88. The stock closed Thursday at $84.81 per share.
This top industrial could really jump with an economic pickup and is also a member of the Merrill Lynch US 1 list. 3M Co. (NYSE: MMM) is closely correlated to U.S. leading economic indicators. The more the indicators continue to improve, the higher the likelihood of strong earnings performance for the company the rest of the year. And with a huge portfolio of products in multiple silos, 3M certainly has staying power.
One issue for the industrial giant is that it has a higher than sector average share of earnings from overseas, so any continued rally of the U.S. dollar against other currencies could lead to a decline in Wall Street earnings estimates and the guidance. With that said, any pickup here domestically could help to offset currency headwinds.
The stock was hit recently, and Merrill Lynch thinks that the pullback makes for an outstanding entry point for new capital and accounts that are adding to positions.
3M investors receive a 2.75% dividend. Merrill Lynch has a strong $178 price target, and the consensus target is $159.71. The stock closed Thursday at $148.85.