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." Verizon Communications (NYSE: VZ) shares currently have a dividend yield of 4.50%. Verizon Communications Inc., through its subsidiaries, provides communications, information and entertainment products and services to consumers, businesses, and governmental agencies worldwide. The company has a P/E ratio of 16.68. The average volume for Verizon Communications has been 14,384,500 shares per day over the past 30 days. Verizon Communications has a market cap of $135.5 billion and is part of the telecommunications industry. Shares are down 3.7% year-to-date as of the close of trading on Thursday. TheStreet Ratings rates Verizon Communications as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, expanding profit margins, good cash flow from operations and impressive record of earnings per share growth. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated. Highlights from the ratings report include:
- VZ's revenue growth has slightly outpaced the industry average of 2.0%. Since the same quarter one year prior, revenues slightly increased by 3.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
- 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. Compared to other companies in the Diversified Telecommunication Services industry and the overall market, VERIZON COMMUNICATIONS INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
- The gross profit margin for VERIZON COMMUNICATIONS INC is rather high; currently it is at 61.49%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 16.31% is above that of the industry average.
- Net operating cash flow has significantly increased by 55.03% to $10,431.00 million when compared to the same quarter last year. In addition, VERIZON COMMUNICATIONS INC has also vastly surpassed the industry average cash flow growth rate of 4.69%.
- VERIZON COMMUNICATIONS INC 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 two years. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, VERIZON COMMUNICATIONS INC increased its bottom line by earning $4.00 versus $0.31 in the prior year. For the next year, the market is expecting a contraction of 12.1% in earnings ($3.52 versus $4.00).
- You can view the full Verizon Communications Ratings Report.
- The revenue growth greatly exceeded the industry average of 1.9%. Since the same quarter one year prior, revenues rose by 35.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
- KINDER MORGAN ENERGY -LP 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 two years. We feel that this trend should continue. During the past fiscal year, KINDER MORGAN ENERGY -LP turned its bottom line around by earning $1.64 versus -$0.33 in the prior year. This year, the market expects an improvement in earnings ($2.76 versus $1.64).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 70.1% when compared to the same quarter one year prior, rising from $405.00 million to $689.00 million.
- Net operating cash flow has increased to $956.00 million or 18.02% when compared to the same quarter last year. In addition, KINDER MORGAN ENERGY -LP has also vastly surpassed the industry average cash flow growth rate of -48.26%.
- 39.07% is the gross profit margin for KINDER MORGAN ENERGY -LP which we consider to be strong. Regardless of KMP's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, KMP's net profit margin of 20.37% significantly outperformed against the industry.
- You can view the full Kinder Morgan Energy Partners Ratings Report.
- RDS.A's debt-to-equity ratio is very low at 0.25 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.79 is somewhat weak and could be cause for future problems.
- ROYAL DUTCH SHELL PLC 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. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, ROYAL DUTCH SHELL PLC reported lower earnings of $5.18 versus $8.52 in the prior year. This year, the market expects an improvement in earnings ($14.49 versus $5.18).
- RDS.A, with its decline in revenue, slightly underperformed the industry average of 1.9%. Since the same quarter one year prior, revenues slightly dropped by 7.5%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- In its most recent trading session, RDS.A 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, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.
- You can view the full Royal Dutch Shell PLC ADR Class A Ratings Report.
- Our dividend calendar.