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 4 stocks with substantial yields, that ultimately, we have rated "Hold." MCG Capital Corporation (NASDAQ: MCGC) shares currently have a dividend yield of 10.80%. MCG Capital Corporation is a private equity firm specializing in investments in middle market companies. The firm does not prefer investments in highly cyclical and volatile industry sectors and businesses with significant volatility exposure. It seeks to invest in small to mid sized companies. The company has a P/E ratio of 12.57. The average volume for MCG Capital Corporation has been 286,600 shares per day over the past 30 days. MCG Capital Corporation has a market cap of $331.1 million and is part of the financial services industry. Shares are up 1.3% year-to-date as of the close of trading on Tuesday. TheStreet Ratings rates MCG Capital Corporation as a hold. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins and good cash flow from operations. However, as a counter to these strengths, we find that the growth in the company's net income has been quite unimpressive. Highlights from the ratings report include:
- The revenue growth came in higher than the industry average of 8.6%. Since the same quarter one year prior, revenues slightly increased by 9.1%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- The gross profit margin for MCG CAPITAL CORP is currently very high, coming in at 80.80%. It has increased significantly from the same period last year. Along with this, the net profit margin of 24.97% is above that of the industry average.
- Net operating cash flow has significantly increased by 272.20% to $63.01 million when compared to the same quarter last year. Despite an increase in cash flow, MCG CAPITAL CORP's average is still marginally south of the industry average growth rate of 273.40%.
- The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. When compared to other companies in the Capital Markets industry and the overall market, MCG CAPITAL CORP's return on equity is below that of both the industry average and the S&P 500.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Capital Markets industry. The net income has decreased by 22.9% when compared to the same quarter one year ago, dropping from $4.27 million to $3.29 million.
- You can view the full MCG Capital Corporation Ratings Report.