Investing

Merrill Lynch's Top Dividend Alpha US Stocks Picks for the Rest of 2016

At 24/7 Wall St. we cover all the major firms on Wall Street with a pretty close eye, and not only do we track their individual stocks and sector selections, but we cover the overall macro outlook from all the companies. One firm that has remained consistently vigilant on 2016 is Merrill Lynch. While not outright negative on the economy and the stock market, the firm is keeping a close eye on the data and has very conservative estimates for the rest of the year.

After a horrible start to 2016, with January having the possibility of being the worst month since 2010, the analysts cite increased volatility and lowered bond yields as warnings signs. While they don’t predict a recession, they do lower their gross domestic product forecast to 2.1% from 2.5%. They also have a list of top U.S. stocks picks they feel can generate alpha, which is the return investments generate above the benchmarks like the S&P 500.

We picked four of the top stocks that also pay outstanding dividends from the list. All are rated Buy at Merrill Lynch.

Enterprise Products Partners

This is one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) once again, despite the energy slump, recently raised the distribution 1%. Enterprise Products maintains a very good long-term position in the market. It provides many of its services on the basis of long-term, fixed-fee contracts, insulating against some of the wilder swings of the commodities that it trades in.

One reason why many analysts may have a liking for the stock might be its distribution coverage ratio. The company’s distribution coverage ratio is well above 1x, making it relatively less risky among the master limited partnerships (MLPs). The company’s distributions have grown for several quarters and are expected to continue in 2016. Plus the Standard & Poor’s current rating is BBB+, which is investment grade, and the outlook is stable.

Enterprise investors receive a very solid 7.04% distribution. The Merrill Lynch price target is $35. The Thomson/First Call consensus target is $32.88. Shares closed Wednesday at $22.22.


Hess

This top mid/large cap pick is down a stunning 50% since last spring. Hess Corp. (NYSE: HES) is an exploration and production company that develops, produces, purchases, transports and sells crude oil, natural gas liquids and natural gas. The company primarily operates in the United States, Denmark, Equatorial Guinea, the Joint Development Area of Malaysia/Thailand, Malaysia and Norway.

Hess has again emerged as the subject of takeover speculation. With a market capitalization falling to just over $10 billion, the company could fall prey to larger integrated as a quick bolt-on acquisition to boost growth. Hess is undergoing somewhat of a transition from an integrated oil and gas company to a predominantly exploration and production entity. The company is shifting its growth approach from high-impact exploration to a smaller, more focused exploration portfolio.

Hess released a much lower capital expenditure budget for 2016, which highlights the company’s efforts for cost containment. The company said it will cut capital spending on exploration and production this year 40% from 2015 to $2.4 billion on low oil prices.

Hess investors are paid a 2.82% dividend. The Merrill Lynch price objective is a massive $85, and the consensus estimate is much lower at $66. The stock closed most recently at $36.85.

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