While plenty of high-yield opportunities exist, investors must always consider the safety of their dividend and the total return potential of their investment. It is not uncommon for a struggling company to suspend high-yielding dividends and subsequently result in precipitous share price declines.
TheStreet Ratings' stock rating model views dividends favorably, but not so much that other factors are disregarded. Our model gauges the relationship between risk and reward in several ways, including: the pricing drawdown as compared to potential profit volatility, i.e. how much one is willing to risk in order to earn profits?; the level of acceptable volatility for highly performing stocks; the current valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's valuation as compared to its stock's performance.
These and many more derived observations are then combined, ranked, weighted, and scenario-tested to create a more complete analysis. The result is a systematic and disciplined method of selecting stocks. As always, stock ratings should not be treated as gospel — rather, use them as a starting point for your own research.
The following pages contain our analysis of 3 stocks with substantial yields, that ultimately, we have rated "Buy." Pepco Holdings (NYSE: POM) shares currently have a dividend yield of 5.30%. Pepco Holdings, Inc., through its subsidiaries, engages in the transmission, distribution, and supply of electricity. The company also distributes and supplies natural gas. The average volume for Pepco Holdings has been 2,383,100 shares per day over the past 30 days. Pepco Holdings has a market cap of $5.1 billion and is part of the utilities industry. Shares are up 4.7% year to date as of the close of trading on Monday. TheStreet Ratings rates Pepco Holdings as a buy. The company's strongest point has been its expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income. Highlights from the ratings report include:
- POM, with its decline in revenue, underperformed when compared the industry average of 18.4%. Since the same quarter one year prior, revenues slightly dropped by 1.4%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- In its most recent trading session, POM has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.
- PEPCO HOLDINGS INC has exprienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, PEPCO HOLDINGS INC increased its bottom line by earning $1.22 versus $1.14 in the prior year. For the next year, the market is expecting a contraction of 6.5% in earnings ($1.14 versus $1.22).
- The gross profit margin for PEPCO HOLDINGS INC is rather low; currently it is at 20.33%. Regardless of POM's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, POM's net profit margin of -35.10% significantly underperformed when compared to the industry average.
- Net operating cash flow has significantly decreased to -$146.00 million or 734.78% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
- You can view the full Pepco Holdings Ratings Report.