Every day we see it, wild swings that are attributed to everything from the price of oil to the possible devaluation of the Chinese yuan to the potential for a recession. At the end of the day, it gets tiresome for patient investors with a long-term horizon who are forced to watch portfolio values see-saw back and forth. So what are investors to do? Buy high-quality stocks paying good dividends and hold them for years.
All the firms we cover here at 24/7 Wall St. have top portfolios that feature stocks that are the highest conviction ideas from their legions of analysts. We screened the Merrill Lynch US 1 list for the top dividend paying stocks in the portfolio. While struggling somewhat year to date, the portfolio has outperformed the S&P 500 on a total return basis since its launch.
AT&T
This company will continue to serve its customers regardless of where oil trades or where the Chinese yuan goes. AT&T Inc. (NYSE: T) is the world’s largest provider of pay TV. It has TV customers in the United States and 11 Latin American countries. In the United States, the AT&T wireless network has the nation’s self-described strongest 4G LTE signal and most reliable 4G LTE.
The company also helps businesses worldwide serve their customers better with its mobility and highly secure cloud solutions. While shares trade at a very cheap 12.5 times estimated 2016 earnings, the company continues to expand its user base, and strong product introductions from smartphone vendors have not only driven traffic but increased device financing plans as well.
While fourth-quarter earnings were in line with forecasts, and slightly below the Wall Street estimates, a change in accounting for the entertainment group lowered revenue/EBITDA by $300 million for the quarter. The Merrill Lynch analysts note that this knocked three cents off the bottom line numbers. So, all in all, a solid quarter, and another reason for conservative accounts to own the stock, especially with solid DirecTV additions and mid-single-digit earnings per share growth estimated for 2016.
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Some analysts now expect the company to become the biggest user of OpenStack cloud computing software worldwide, as it expects to build out its private cloud to 500,000 nodes (servers) that span across hundreds of data centers. OpenStack helps corporate information technology departments manage data centers packed with computer servers. Rackspace Hosting and government space agency NASA co-developed OpenStack in 2010, aiming to make the software a cloud computing standard.
AT&T investors are paid a huge 5.14% dividend. The Merrill Lynch price target for the stock is $40, and the Thomson/First Call consensus price objective is at $37.54. The stock closed Thursday at $37.37 per share.
CF Industries
This is a company that is somewhat off the radar, but it could be a very solid addition to growth and income portfolios. CF Industries Holdings Inc. (NYSE: CF) is a global leader in the manufacturing and distribution of nitrogen products, serving both agricultural and industrial customers.
The company operates world-class nitrogen manufacturing complexes in Canada, the United Kingdom and the United States, and it distributes plant nutrients through a system of terminals, warehouses and associated transportation equipment located primarily in the midwestern United States. CF Industries also owns a 50% interest in an ammonia facility in the Republic of Trinidad and Tobago.
While the company reported mixed fourth-quarter results, the Merrill Lynch team notes that near-term fundamentals remain robust, while low inventory, weak fall application and strong demand could be setting stage for higher prices. The analysts also see share repurchases and Chinese capacity closures as catalysts that could emerge as this year unfolds.
CF investors are paid a very solid 3.62% dividend. Merrill Lynch has a $45 price target, and the consensus target is posted at $41.85. Shares closed most recently at $33.16, up more than 4% on the day.
Pfizer
This top pharmaceutical stock just recently was added to the US 1 portfolio. Pfizer Inc. (NYSE: PFE) has a very strong pipeline, and the fact that it is the world’s largest drug manufacturer by sales value supports the Wall Street notion that the company can generate higher long-term revenues through the accelerated growth of its new drugs over the next five years.
The company announced recently the details in what would be one of this year’s biggest deals, a $160 billion merger with Allergan. But the Treasury Department said recently that it is working on new rules for corporate tax inversions, which is potentially what the Pfizer and Allergan deal would be, and that possibly could throw a wrench into the negotiations. Yet, Pfizer executives maintain that they don’t think government will scuttle the deal.
The Merrill Lynch analysts see 37% upside from current levels, and 51% if the Allergan deal does indeed go through. With $3 to $5 arbitrage pressure on the stock, there is some downside protection even if the deal does break.
Pfizer has announced that it is starting 20 clinical trials this year, and more soon after, on treatments to conquer cancer as it also seeks to gain leadership in one of the hottest and most lucrative areas of medicine. Hedge funds seem to like the stock as a total of 22 have stakes in it now.
Pfizer investors are paid a rich 3.92% dividend. The Merrill Lynch price target for the shares is $39, and the consensus price target is set at $39.13. Pfizer closed Tuesday at $30.59 per share.
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All three of these stocks make good sense for growth and income portfolios that can tolerate some risk. For the long haul, though, they should provide a much better avenue for total return and continue to increase dividend payouts.
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