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 "Sell." Equity Residential (NYSE: EQR) shares currently have a dividend yield of 5.00%. Equity Residential, a real estate investment trust (REIT), engages in the acquisition, development, and management of multifamily properties in the United States. The company has a P/E ratio of 403.85. The average volume for Equity Residential has been 1,911,000 shares per day over the past 30 days. Equity Residential has a market cap of $18.9 billion and is part of the real estate industry. Shares are down 8.2% year-to-date as of the close of trading on Thursday. TheStreet Ratings rates Equity Residential as a sell. The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity, poor profit margins and generally disappointing historical performance in the stock itself. Highlights from the ratings report include:
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Real Estate Investment Trusts (REITs) industry and the overall market, EQUITY RESIDENTIAL's return on equity significantly trails that of both the industry average and the S&P 500.
- The gross profit margin for EQUITY RESIDENTIAL is rather low; currently it is at 19.20%. It has decreased significantly from the same period last year. Despite the weak results of the gross profit margin, the net profit margin of 59.98% has significantly outperformed against the industry average.
- The share price of EQUITY RESIDENTIAL has not done very well: it is down 5.28% and has underperformed the S&P 500, in part reflecting the company's sharply declining earnings per share when compared to the year-earlier quarter. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
- EQUITY RESIDENTIAL has experienced 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. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, EQUITY RESIDENTIAL increased its bottom line by earning $0.57 versus $0.15 in the prior year. This year, the market expects an improvement in earnings ($4.33 versus $0.57).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Real Estate Investment Trusts (REITs) industry. The net income increased by 66.8% when compared to the same quarter one year prior, rising from $226.14 million to $377.19 million.
- You can view the full Equity Residential Ratings Report.