Nobody would have thought a few years ago that we would be in a situation where yields are as low as they are now. These are not just recent low yields. They are record generational low yields, that haven’t been seen in this area since the 1950s, and incredibly 30% of bonds around the world are in negative yield territory. One thing is for sure, a yield grab is underway, and one Wall Street firm thinks it is very likely to persist.

A recent research report from Savita Subramanian, the outstanding Equity and Quantitative strategist at Merrill Lynch, takes an old Wall Street adage and modifies it slightly when discussing yield. The firm is looking for yield at a reasonable price, or YARP as they call it, and the top telecom companies still fit well in that group.

The Merrill Lynch team make the case that despite their big run this year, telecom offers the highest multiple of dividend yield to the 10-year Treasury, along with a lower payout ratio and lower price-to-earnings multiple. While smartphone adoption is not the tailwind it was in past year, data usage is.

Here are four top dividend telecom stocks rated Buy at Merrill Lynch.

AT&T

This company has had an incredible run this year, and the Merrill Lynch team sees it going even higher. AT&T Inc. (NYSE: T) is the world’s largest provider of pay TV, with 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 mobility and highly secure cloud solutions.

With its shares trading at a very cheap 14.3 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.

The company reported inline numbers for the second quarter, and while the consolidated revenue number was slightly higher than the Merrill Lynch estimate, the EBITDA was slightly below. Company management noted it is on track to meet or exceed current estimates for the year.

Many Wall Street analysts have cited the company’s positive commentary on free cash flow, in addition to improving video/broadband trends later this year, with single truck-roll and new converged offerings expected to be coming in October.

AT&T investors are paid a huge 4.5% dividend. The Merrill Lynch price target for the stock is $46, and the Wall Street consensus target is $42.27. The stock closed Friday at $43.29 per share.

CenturyLink

This is the largest of the rural local exchange carriers (RLECs) and is expected to continue get a large dose of government money to provide continuing internet service in rural areas. CenturyLink Inc. (NYSE: CTL) is a global communications, hosting, cloud and IT services company enabling millions of customers to transform their businesses through innovative technology solutions.

CenturyLink offers network and data systems management, Big Data analytics and IT consulting, and it operates more than 55 data centers in North America, Europe and Asia. The company provides broadband, voice, video, data and managed services over a robust 250,000-route-mile U.S. fiber network and a 300,000-route-mile international transport network.

Top Wall Street analysts have liked like the stock over the past year as the company transforms itself from a telecom to a technology company. While some have worried over CenturyLink maintaining the dividend, the UBS team is positive on the comparisons for the second half of the year and sequential revenue stability. They also cite an update on the data center sale progress and the potential for stock buybacks as additional positives.

CenturyLink investors receive a gigantic 6.87 % dividend. The Merrill Lynch price target $42, and the consensus estimate is $29.57. The stock closed trading on Friday at $31.44.
Verizon Communications

This top telecommunications company is rated Buy at Merrill Lynch. Verizon Communications Inc. (NYSE: VZ) is a global leader in delivering the digital world. Verizon Wireless operates America’s self-described most reliable wireless network, with 109.5 million retail connections nationwide. Verizon also provides converged communications, information and entertainment services over America’s most advanced fiber-optic network, and it delivers integrated business solutions to customers worldwide.

The company reported solid second-quarter earnings; however, revenues came in short of Wall Street and Merrill Lynch expectations. The analysts note that management kept guidance in line with expectations, excluding the impact of the strike-related work stoppage.

Verizon also recently announced the purchase of Yahoo’s core operating business for $4.8 billion in cash. The analysts feel it plays into Verizon’s strategic drive to expand into advertising and content, and they also think the transaction is largely immaterial from a financial perspective.

Verizon investors are paid a 4.08% dividend. The Merrill Lynch price target is $59, and the consensus price objective is $54.04. Shares closed Friday at $55.41.

Windstream

This telecommunications company has solid dividend coverage and could have sizable upside as well. Windstream Holdings Inc. (NYSE: WIN) is the sixth-largest U.S. incumbent local exchange carrier and the third-largest rural ILEC, serving 3 million access lines, primarily in small markets and rural communities in 16 states. The company offers residential and business customers local voice, long distance, internet access, high-speed data and enhanced services.

The company has been divesting its holding in Communications Sales and Leasing and recently sold a 50% position, which came to 14.7 million shares. The company is using the proceeds to reduce debt, which the Merrill Lynch analysts feel could be as much as $670 million. The interest expense also will drop dramatically.

Windstream investors are paid a 6.44% dividend. The Merrill Lynch price target is a stout $16, and the consensus target is much lower at $9.02. Shares closed Friday at $9.31.

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

The general consensus is that telecom is overbought and a crowded trade, but Merrill Lynch thinks that on a valuation basis it remains very compelling, and from a yield perspective it still makes sense for investors looking for dividends.

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