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." American Electric Power (NYSE: AEP) shares currently have a dividend yield of 4.20%. American Electric Power Company, Inc., a public utility holding company, engages in the generation, transmission, and distribution of electric power to retail customers. The company generates electricity using coal and lignite, natural gas, nuclear energy, and hydroelectric energy. The company has a P/E ratio of 15.66. The average volume for American Electric Power has been 3,076,400 shares per day over the past 30 days. American Electric Power has a market cap of $23.2 billion and is part of the utilities industry. Shares are up 2.8% year-to-date as of the close of trading on Friday. TheStreet Ratings rates American Electric Power as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, notable return on equity and good cash flow from operations. We feel these strengths outweigh the fact that the company shows low profit margins. Highlights from the ratings report include:
- AEP's revenue growth has slightly outpaced the industry average of 0.1%. Since the same quarter one year prior, revenues slightly increased by 4.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
- AMERICAN ELECTRIC POWER CO reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, AMERICAN ELECTRIC POWER CO increased its bottom line by earning $3.04 versus $2.60 in the prior year. This year, the market expects an improvement in earnings ($3.34 versus $3.04).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Electric Utilities industry. The net income increased by 1547.6% when compared to the same quarter one year prior, rising from $21.00 million to $346.00 million.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Electric Utilities industry and the overall market on the basis of return on equity, AMERICAN ELECTRIC POWER CO has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
- Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- You can view the full American Electric Power Ratings Report.