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." Starwood Property (NYSE: STWD) shares currently have a dividend yield of 7.90%. Starwood Property Trust, Inc. originates, acquires, finances, and manages commercial mortgage loans, other commercial real estate debt investments, commercial mortgage-backed securities, and other commercial real estate-related debt investments in the United States and Europe. The company has a P/E ratio of 13.29. The average volume for Starwood Property has been 2,278,600 shares per day over the past 30 days. Starwood Property has a market cap of $4.7 billion and is part of the real estate industry. Shares are down 13.3% year-to-date as of the close of trading on Friday. TheStreet Ratings rates Starwood Property as a buy. The company's strengths can be seen in multiple areas, such as its robust revenue growth, growth in earnings per share, compelling growth in net income and expanding profit margins. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity. Highlights from the ratings report include:
- STWD's very impressive revenue growth greatly exceeded the industry average of 6.7%. Since the same quarter one year prior, revenues leaped by 117.1%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- STARWOOD PROPERTY TRUST INC has improved earnings per share by 20.9% 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, STARWOOD PROPERTY TRUST INC increased its bottom line by earning $1.78 versus $1.41 in the prior year. This year, the market expects an improvement in earnings ($2.15 versus $1.78).
- 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 78.7% when compared to the same quarter one year prior, rising from $50.21 million to $89.72 million.
- 46.15% is the gross profit margin for STARWOOD PROPERTY TRUST INC which we consider to be strong. Despite the high profit margin, it has decreased significantly from the same period last year. Despite the mixed results of the gross profit margin, STWD's net profit margin of 56.03% significantly outperformed against the industry.
- STWD has underperformed the S&P 500 Index, declining 12.83% from its price level of one year ago. 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 Starwood Property Ratings Report.