Investing

3 Stocks Rated Buy at Merrill Lynch That Pay at or Above 8% Dividends

Lee Jackson

Published: May 5, 2016 10:35 am

Last Updated: January 13, 2020 9:50 am

One question that always seems to come up these days is when interest rates are going higher. The best answer to that is maybe by the end of the year. But back to levels where investors who need safe income from FDIC-guaranteed bank certificates of deposit can get return? Maybe not for years.

So the question becomes how can investors that need income get higher levels without exorbitant risk?

The answer to that question is that it is hard to reach for yield and not have an increase in risk, so the next question is how much risk you can afford. For very conservative accounts, the answer is not much, so utilities and telecoms are a decent way to get higher yields. For investors with a touch more risk tolerance, a variety of equity securities may provide the answer.

We screened the Merrill Lynch research universe for companies that offer higher yields and are rated Buy. Three of them hit the mark.

Again, these are only suitable for more aggressive investors as these are generally riskier companies than traditional blue chips.

Frontier Communications

This is a rural local exchange carrier that the Merrill Lynch team has remained positive on. Frontier Communications Corp. (NASDAQ: FTR) offers broadband, voice, video, wireless internet data access, data security solutions, bundled offerings, specialized bundles for residential customers, small businesses and home offices and advanced business communications for medium and large businesses in 28 states. Its approximately 17,800 employees are based entirely in the United States.

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Wall Street analysts note that the company has taken broadband share in almost 80% of operating markets last year. The company’s $8.5 billion acquisition of Verizon’s wireline operations that were providing services to residential, commercial and wholesale customers in California, Florida and Texas are a huge difference maker when it comes to the Merrill Lynch 2016 and 2017 estimates.

The analysts increase 2016 EBITDA numbers from $2.129 billion to $3.751 billion. The 2017 EBITDA numbers go from $2.121 billion to $4.308 billion. The company is expected to report earnings in early May. The analysts also feel that company will be generating cash flow to cover the large dividend by more than two times.

The company reported a better than anticipated first-quarter EBITDA number and guided in line to ahead of Wall Street estimates on post-Verizon deal cash flow. Frontier is the highest yielding non-energy component in the S&P 500.

Frontier investors receive a huge 7.85% dividend. The Merrill Lynch price target is $9, well above the Thomson/First Call consensus target of $6.25. The stock closed Wednesday at $5.35.

NuStar Energy

This company posted solid first-quarter numbers that beat on the bottom line but missed revenue estimates. NuStar Energy L.P. (NYSE: NS) is one of the largest independent liquids terminal and pipeline operators in the nation. It currently has approximately 8,700 miles of pipeline and 79 terminal and storage facilities that store and distribute crude oil, refined products and specialty liquids.

The master limited partnership’s combined system has approximately 93 million barrels of storage capacity, and NuStar has operations in the United States, Canada, Mexico, the Netherlands (including St. Eustatius in the Caribbean) and the United Kingdom.

The company reported solid first-quarter 2016 earnings on the back of lower operating expenses and bigger contribution from the storage segment. The bottom line beat the Wall Street consensus estimate but was down from the year-ago quarter.

Quarterly revenues came in lower than expectations and also decreased from the year-ago print. The decline in revenues was mainly attributable to lower throughput volumes from the pipeline segment and decreased revenues from product sales.

NuStar investors receive an 8.76% distribution. Merrill Lynch has a $51 price objective, and the consensus target is $46.78. Shares closed Wednesday at $50.

Starwood Property Trust

This top real estate company makes good sense for income investors now. Starwood Property Trust Inc. (NYSE: STWD) is an affiliate of global private investment firm Starwood Capital Group and is the largest commercial mortgage real estate investment trust (REIT) in the United States.

Its core business focuses on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt and equity investments. Through its subsidiaries LNR Property and Hatfield Philips International, Starwood Property Trust also operates as the largest commercial mortgage special servicer in the United States and one of the largest primary and special servicers in Europe.

Investors receive an outstanding 9.88% distribution. The Merrill Lynch price target is $21.50. The consensus target is at $21.89. Shares closed Wednesday at $19.44.

While these are all rated Buy at Merrill Lynch, they are aggressive income ideas, and really only suited for accounts with a solid risk tolerance. It is also important to remember that master limited partnership distributions may contain return of capital.