Investing

Rates Are Plunging: Merrill Lynch Has 4 Buy Rated Stocks That All Yield 6%

Lee Jackson

Published: January 30, 2020 6:45 am

Last Updated: March 5, 2020 7:20 am

One of the few negative results of lower interest rates is the effect it has on savers and people that rely on reasonably safe and secure income. After raising rates three times in 2018, the Federal Reserve reversed course in 2019 and lowered rates, and it also started a new version of quantitative easing that has moved the benchmark 10-year yield back to the same level it was back in the fall of 2019 and in November of 2016 at 1.59%.

Some feel that the benchmark 10-year Treasury bond can go lower, much lower. In fact, some analysts feel that eventually the bond will touch the 1.25% level, which would blow through the lows of the past 20 years. While that is great for those looking to buy or refinance a new home or other major purchase, it’s very rough for conservative investors who need a steady stream of income.

We screened the Merrill Lynch research database looking for income ideas that are rated Buy by the firm, and offer consistent and dependable dividends. We found four top plays that make sense for those looking for a degree of safety and high current income, as all yield 6% or more.

Altria

This maker of tobacco products still offers value investors a great entry point and was hit recently as cigarette sales have slowed. Altria Group Inc. (NYSE: MO) is the parent company of Philip Morris USA (cigarettes), UST (smokeless), John Middleton (cigars), Ste. Michelle Wine Estates and Philip Morris Capital. PMUSA enjoys a 51% share of the U.S. cigarette market, led by its top cigarette brand Marlboro, one of the most valuable brands in the world.

Altria also owns over 10% of Anheuser-Busch InBev, the world’s largest brewer. In March 2008, it spun off its international cigarette business to shareholders. In December 2018, the company acquired 35% of Juul Labs. The company also has purchased a 45% stake in cannabis company Cronus for $1.8 billion.

The negative press on vaping has been a big headwind, and the crash in marijuana stock prices have weighed on this worldwide leader. In addition, the legal age to buy tobacco products recently was raised to 21. Despite all the headwinds, investors are still able to buy the stock at a very reasonable price.

Altria investors will pocket a huge 6.71% dividend. The Merrill Lynch team has a price objective of $60 on the shares, while the Wall Street consensus price target is $54.96. Altria stock was closed Wednesday’s trading at $50.11 a share.

Enterprise Products Partners

This company is the largest publicly traded master limited partnership (MLP) and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) provides a wide variety of midstream energy services, including gathering, processing, transportation and storage of natural gas, natural gas liquids fractionation, import and export terminaling, and offshore production platform services.

One reason many analysts may have a liking for the stock might be its distribution coverage ratio. The company’s distribution coverage ratio is well above one times, making it relatively less risky among the MLPs. The company’s distributions have grown consistently over the years, and earlier this year, Enterprise Products Partners announced that the board of directors of its general partner declared an increase in the quarterly cash distribution paid to partners to $0.445 per common unit, or $1.765 per unit on an annualized basis.

Investors are paid a very solid 6.47% distribution. The Merrill Lynch price target is $36, and the posted consensus target was last seen at $34.44. Enterprise Products Partners stock closed at $27.28 per share on Wednesday.

This is a very unique and interesting way to play the gaming sector and generate income. Gaming and Leisure Properties Inc. (NASDAQ: GLPI) is a real estate investment trust (REIT) engaged in the business of acquiring, financing and owning real estate property to be leased to gaming operators in triple-net lease arrangements. Pursuant to this, the tenant is responsible for all facility maintenance, insurance required in connection with the leased properties and the business conducted on the leased properties, taxes levied on or with respect to the leased properties and all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties.

The company expects to continue to grow its portfolio by pursuing opportunities to acquire additional gaming facilities to lease to gaming operators. They also intend to diversify the corporate portfolio over time, including by acquiring properties outside the gaming industry to lease to third parties. The company’s current portfolio consists of 44 casinos, including two TRS properties and the real property associated with 42 facilities spread around the United States.

Gaming and Leisure offers shareholders an outstanding 6% distribution. The $47 Merrill Lynch price target compares with the $45.47 consensus target, as well as the most recent closing price of $46.87.

Omega Healthcare

This company is in one of the fastest-growing subsectors of the REIT industry. Omega Healthcare Investors Inc. (NYSE: OHI) is a publicly traded, internally managed health care REIT that is focused on owning skilled nursing facilities. The company also owns assisted living facilities, specialty facilities and a medical office property.

The company’s portfolio of assets is operated by a diverse group of health care companies, predominantly in a triple-net lease structure. The assets span all regions within the United States, as well as in the United Kingdom.

Omega’s tenants generally have lower exposure to Medicare, which is where the funding pressures tend to remain, and less than 10% of revenues come from tenants with rent coverage below 1.0 times. In addition, the tenant base is very well diversified.

Shareholders receive a very strong 6.19% distribution. Merrill Lynch has set its price target at $45. The consensus is target is $43.38, but note that the shares closed most recently at $43.30.

Four different areas of the market to choose from, and all these companies pay dependable 6% or better dividends. It is important to note that both REITs and MLPs pay distributions that could result in the return of principal. With that in mind, the continued low-interest-rate scenario bodes well for these stocks that serve as bond proxy vehicles.