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

By Lee Jackson Updated Apr 6, 5:51PM EDT · Published Oct 22, 8:45AM EDT

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One group of investors that has had more than their fill of quantitative easing (QE) is income investors, who rely on investments that pay steady and dependable dividends or distributions that help supplement other sources of income. The whole point of QE was to drive down interest rates to make higher risk assets more attractive. While that has worked out pretty well for growth stock investors with long time horizons, income and growth and income investors were left with very little to cheer about.

In the early 2000s, large money center banks were offering certificates of deposit, guaranteed for principal up to $250,000, that yielded anywhere from 5% to 7%. Currently that is in the 2%-plus range. We screened the Merrill Lynch research universe for companies, not including destroyed energy master limited partnerships or business development companies, that offered higher yields. All these stocks are rated Buy at Merrill Lynch, and while they yield higher, they are not suitable for ultra-conservative income accounts.

Carlyle Group

This top investment firm has been mauled by the markets and could be offering an incredible entry point here. The Carlyle Group L.P. (NASDAQ: CG) is a global alternative asset manager with $193 billion of assets under management across 128 funds and 159 fund of funds vehicles as of June 30, 2015.

Carlyle invests across four segments — Corporate Private Equity, Real Assets, Global Market Strategies and Investment Solutions — in Africa, Asia, Australia, Europe, the Middle East and North and South America. Carlyle has expertise in various industries, including aerospace, defense and government services, consumer and retail, energy, financial services, health care, industrial, real estate, technology and business services, telecommunications and media and transportation.

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While the Merrill Lynch team acknowledges that Carlyle probably had a difficult third quarter, and the share price reflects that, they think that it is an exceptional value now and provides investors a very solid entry point. They see assets under management growing and an increase in management fees and fee-related earnings.

Carlyle investors are paid a whopping 15.8% distribution. The Merrill Lynch price target for the stock is $23, and the Thomson/First Call consensus target is higher at $25.03. Shares closed Wednesday at $18.79.
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.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.