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 which could 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." KCAP Financial (NASDAQ: KCAP) shares currently have a dividend yield of 12.30%. KCAP Financial, Inc. is a private equity and venture capital firm specializing in mid market, buyouts, and mezzanine investments. It focuses on mature and middle market companies. The company has a P/E ratio of 15.34. The average volume for KCAP Financial has been 213,700 shares per day over the past 30 days. KCAP Financial has a market cap of $271.1 million and is part of the financial services industry. Shares are up 1.6% year-to-date as of the close of trading on Tuesday. TheStreet Ratings rates KCAP Financial as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income. Highlights from the ratings report include:
- The revenue growth greatly exceeded the industry average of 16.6%. Since the same quarter one year prior, revenues rose by 14.5%. 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 KCAP FINANCIAL INC is currently very high, coming in at 81.27%. Regardless of KCAP's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 12.11% trails the industry average.
- KCAP FINANCIAL INC 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 year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, KCAP FINANCIAL INC reported lower earnings of $0.53 versus $0.91 in the prior year. This year, the market expects an improvement in earnings ($1.00 versus $0.53).
- The share price of KCAP FINANCIAL INC has not done very well: it is down 23.73% 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. 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 KCAP Financial Ratings Report.