Investing

Merrill Lynch High-Quality Dividend Yield Stocks Offer Investors 'Safe-Space'

Lee Jackson

Published: June 29, 2017 10:10 am

Last Updated: January 12, 2020 10:35 am

It has been years since we have witnessed the kind of market we are in now. After this run finally peters out, it may be years again before we see another one. Incredibly low volatility, a lack of 10% or even 5% declines, and a basic investor malaise that comes with eight years of rising equity prices with virtually zero volatility. Toss in declining yields and a flattening yield curve, and there is indeed ample reason for investors’ concern.

So what do investors do now? Cash isn’t the answer, especially for those in search of income, and jumping into expensive technology stocks like the FANG stocks is only for investors with a very high risk tolerance. The answer may be the Merrill Lynch High Quality and Dividend Yield stocks, a portfolio the firm has run since 2004. The screen seeks to identify high-quality stocks with secure and above-market dividend yields that are aligned with the firm’s analysts’ fundamental outlook.

We found five stocks on the list that are rated Buy and make sense for nervous investors who want to stay in the market but are concerned we may see a pullback.

CVS

This is a top stock that has been trading sideways and may be offering an excellent entry point. CVS Health Corp. (NYSE: CVS) provides integrated pharmacy health care services. Its Pharmacy Services segment offers pharmacy benefit management solutions, such as plan design and administration, formulary management.

The Retail/LTC segment sells prescription drugs, over-the-counter drugs, beauty products and cosmetics, personal care products, convenience foods, seasonal merchandise and greeting cards, as well as provides photo finishing services. It operates 9,655 retail stores in 49 states, the District of Columbia, Puerto Rico and Brazil, primarily under the CVS Pharmacy, CVS, Longs Drugs, Navarro Discount Pharmacy and Drogaria Onofre names. It also operates online retail pharmacy websites and 32 on-site pharmacy stores, long-term care pharmacy operations and retail health care clinics.

Some think that Warren Buffett may have his eye on the company, which surely will receive more interest now with the Walgreens/Rite-Aid deal falling apart.

CVS investors receive a 2.46% dividend. The Merrill Lynch price target for the stock is $90, and the Wall Street consensus target is $87.95. The shares closed Wednesday at $81.25.

3M

This top industrial could really jump with an economic pickup, and only 19% of mutual funds currently hold the stock. 3M Co. (NYSE: MMM) is a diversified, global manufacturer. Its businesses are technology-driven and organized under five segments: Consumer, Safety and Graphics, Electronics and Energy, Healthcare, and Industrial. Its popular brands include Scotch, Post-It, 3M and Thinsulate. The company also holds over 500 U.S. patents.

The company recently entered into a definitive agreement with Johnson Controls to acquire the latter’s operating unit Scott Safety. The deal, worth $2.0 billion, is expected to close in the second half of 2017. The acquisition will likely boost 3M’s technology, manufacturing, global capabilities and brand. In addition, it will enable the company to expand its recent portfolio actions within the Safety and Graphics business to help position for long-term success.

Shareholders are paid a 2.23% dividend. Merrill Lynch has a $225 price target, and the consensus target is $198.46. The stock closed Wednesday at $210.62.

Procter & Gamble

The company offers a very solid dividend and safety. Procter & Gamble Co. (NYSE: PG) is another solid consumer staples stock for conservative investors to consider. It sells lots of very well-known household items that are essential for everyday life. Brands include Pampers, Tide, Bounty, Charmin, Gillette, Oral B, Crest, Olay, Pantene, Head & Shoulders, Ariel, Gain, Always, Tampax, Downy and Dawn.

The company posted solid earnings last quarter, and many on Wall Street feel that the new focus on a slimmed down product portfolio will help spur earnings growth and return the company to its long-time premium consumer staples multiple. Some analysts’ estimates for the next two years are 2% above current Wall Street expectations.

P&G actually is innovative in its product development process and uses that to help ensure future growth and cash flow. This should provide investors years of steady growth and dividends. While currency headwinds have weighed on earnings and projections, a weaker dollar scenario would bode well for the future.

Shareholders are paid a 3.08% dividend. The $98 Merrill Lynch price objective compares with the consensus target of $91.59. The stock closed Wednesday at $88.37.

United Technologies

This is a very diversified company with large government contract exposure, and it is also on the Merrill Lynch US 1 list of high conviction stock picks. United Technologies Corp. (NYSE: UTX) is an industrial that provides high-technology products and services to aerospace industries and building systems worldwide. Its segments are UTC Climate, Otis, Controls & Security, UTC Aerospace Systems and Pratt & Whitney.

Many Wall Street analysts believe the company is strategically positioned to benefit from two megatrends in the long-term: urbanization and commercial aerospace. The company received good news recently as the military and foreign buyers are set to increase purchase of the F-135 Jets. UTC’s Pratt & Whitney division, which builds the F135 engine for the military, earns a superb 22.5% profit margin on its products.

Investors receive a 2.3% dividend. Merrill Lynch has set its price target at $140. The consensus target is $125.67. Shares closed Wednesday at $122.50.

Walmart

This giant retailer has done very well since bouncing off lows for the year in January. Wal-Mart Stores Inc. (NYSE: WMT) operates retail stores in various formats worldwide, including discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, cash and carry stores, home improvement stores, specialty electronics stores, restaurants, apparel stores, drug stores and convenience stores. It also operates via retail websites, such as Walmart.com and SamsClub.com.

Each week, nearly 260 million customers and members visit the company’s 11,535 stores under 72 banners in 28 countries and e-commerce websites in 11 countries. With fiscal year 2016 revenue of $482.1 billion, Walmart employs approximately 2.2 million associates worldwide.

Merrill Lynch said this in its research report after the company reported strong fiscal 2018 first-quarter results:

We believe Wal-Mart’s omni-channel transformation is gaining momentum & should position the company as the other “Everything Store.” The company also continues to execute well on its strategy to improve its core US stores, with a focus on key traffic-driving areas.

Shareholders receive a 2.7% dividend. The Merrill Lynch price target is $90. The posted consensus target is $80.49, and shares closed Wednesday at $76.51.

These are five stocks that investors can feel very comfortable with. Despite the relative safety, it may make sense to buy partial positions now and see how second-quarter earnings and guidance fare. A miss on either could bring some selling.