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

ADP

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.

3M

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.
Qualcomm

This top technology stock has totally underperformed this year but is also a member of the Merrill Lynch US 1 list. Qualcomm Inc. (NASDAQ: QCOM) is still a Wall Street favorite, and many are sticking to their guns, basically saying that trading at current levels (12.6 times estimated 2016 earnings), it may be a tremendous long-term value. This quality tech company has recurring royalty revenue and a strong footprint, so patient investors may fare very well.

The company is reported to be losing chip business, and activist investors Jana Partners have pressured Qualcomm to spin off its chip business for some time. Jana also wants Qualcomm to continue to cut costs, accelerate a share buyback, improve disclosures and refresh its board, which it accomplished when two new directors were added last summer. Jana is listed as one of the company’s largest shareholders, with a reported $2 billion stake.

The growth of 3G mobile technologies in emerging markets, like China and India, has positively affected Qualcomm and could be a difference maker going forward. Qualcomm is and has been for years a market leader in the development of 3G CDMA (Code Division Multiple Access) technologies. The company recently developed an LTE chipset that supports SCDMA (Synchronous Code Division Multiple Access) technology. China’s mobile network runs on this, and it could provide the company with a huge leg up in years to come. Qualcomm signed a big licensing deal recently in China that gave the stock a solid boost.

Qualcomm investors receive a 3.95% dividend. Merrill Lynch has a mammoth $75 price target. The consensus target is lower at $63.28. Shares closed Thursday at $47.54.

United Technologies

This diversified industrial company has large government contract exposure. United Technologies Corp. (NYSE: UTX) provides high-technology products and services to aerospace industries and building systems worldwide. Its segments are UTC Climate, Otis, Controls & Security, UTC Aerospace Systems, Pratt & Whitney and Sikorsky. Since peaking in late February, the stock has rolled over and not acted well. Many Wall Street analysts believe UTC is strategically positioned to benefit from two megatrends in the long-term: urbanization and commercial aerospace.

The completion of the Sikorsky sale to Lockheed was viewed by many on Wall Street as preferable to a spin-off after the premium that Lockheed Martin was willing to pay made up for the tax cost UTC would have incurred.

The company recently promised a plan for growing profits in the new year, significant cost cuts to continue expanding profitability and a big stock buyback, and shares promptly sold off. With the company trading down a quick 5% since early November, this is a superb entry point for investors.

Shareholders are paid a solid 2.7% dividend. The $110 Merrill Lynch price target compares to a $108.53 consensus estimate. Shares closed Thursday at $93.87.

These stocks are perfect for more conservative growth investors. They all pay solid dividend and offer solid upside from current trading levels. They also won’t be destroyed in a market correction, should we see one to start the new trading year.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.