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 "Sell." ZAIS Financial (NYSE: ZFC) shares currently have a dividend yield of 9.60%. ZAIS Financial Corp., through its subsidiary, ZAIS Financial Partners, L.P., invests, finances, and manages various residential mortgage assets, real estate-related securities, and financial assets. The company has a P/E ratio of 18.21. The average volume for ZAIS Financial has been 37,900 shares per day over the past 30 days. ZAIS Financial has a market cap of $133.5 million and is part of the real estate industry. Shares are up 1.6% year-to-date as of the close of trading on Tuesday. TheStreet Ratings rates ZAIS Financial as a sell. The area that we feel has been the company's primary weakness has been its generally disappointing historical performance in the stock itself. Highlights from the ratings report include:
- ZFC has underperformed the S&P 500 Index, declining 19.89% from its price level of one year ago.
- Compared to other companies in the Real Estate Investment Trusts (REITs) industry and the overall market on the basis of return on equity, ZAIS FINANCIAL CORP underperformed against that of the industry average and is significantly less than that of the S&P 500.
- The gross profit margin for ZAIS FINANCIAL CORP is rather high; currently it is at 69.05%. Despite the high profit margin, it has decreased significantly from the same period last year. Despite the mixed results of the gross profit margin, ZFC's net profit margin of 91.90% significantly outperformed against the industry.
- Net operating cash flow has improved to $2.91 million from having none in the same quarter last year. Since the company had no net operating cash flow for the prior period, we cannot calculate a percent change in order to compare its growth rate with that of its industry average.
- You can view the full ZAIS Financial Ratings Report.