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." Digital Realty (NYSE: DLR) shares currently have a dividend yield of 5.70%. Digital Realty Trust, Inc., a real estate investment trust (REIT), through its controlling interest in Digital Realty Trust, L.P., engages in the ownership, acquisition, development, redevelopment, and management of technology-related real estate. The company has a P/E ratio of 28.31. The average volume for Digital Realty has been 1,791,000 shares per day over the past 30 days. Digital Realty has a market cap of $7.8 billion and is part of the real estate industry. Shares are up 17% year-to-date as of the close of trading on Thursday. TheStreet Ratings rates Digital Realty as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income. Highlights from the ratings report include:
- Despite its growing revenue, the company underperformed as compared with the industry average of 10.1%. Since the same quarter one year prior, revenues slightly increased by 9.5%. 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 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. When compared to other companies in the Real Estate Investment Trusts (REITs) industry and the overall market, DIGITAL REALTY TRUST INC's return on equity is below that of both the industry average and the S&P 500.
- DIGITAL REALTY TRUST INC's earnings per share declined by 23.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, DIGITAL REALTY TRUST INC increased its bottom line by earning $2.10 versus $1.47 in the prior year. For the next year, the market is expecting a contraction of 51.2% in earnings ($1.03 versus $2.10).
- Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, DLR has underperformed the S&P 500 Index, declining 8.66% 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 Digital Realty Ratings Report.
- The net income growth from the same quarter one year ago has exceeded that of the Hotels, Restaurants & Leisure industry average, but is less than that of the S&P 500. The net income increased by 2.1% when compared to the same quarter one year prior, going from -$62.53 million to -$61.20 million.
- SIX FLAGS ENTERTAINMENT CORP' earnings per share from the most recent quarter came in slightly below the year earlier quarter. 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, SIX FLAGS ENTERTAINMENT CORP reported lower earnings of $1.20 versus $3.04 in the prior year. This year, the market expects an improvement in earnings ($1.43 versus $1.20).
- SIX, with its decline in revenue, slightly underperformed the industry average of 6.2%. Since the same quarter one year prior, revenues fell by 15.8%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
- In its most recent trading session, SIX 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. 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.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market, SIX FLAGS ENTERTAINMENT CORP's return on equity significantly exceeds that of both the industry average and the S&P 500.
- You can view the full Six Flags Entertainment Ratings Report.
- Despite its growing revenue, the company underperformed as compared with the industry average of 9.2%. Since the same quarter one year prior, revenues slightly increased by 4.2%. 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.
- UIL HOLDINGS CORP' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, UIL HOLDINGS CORP increased its bottom line by earning $2.18 versus $2.02 in the prior year. This year, the market expects an improvement in earnings ($2.28 versus $2.18).
- The net income growth from the same quarter one year ago has exceeded that of the Electric Utilities industry average, but is less than that of the S&P 500. The net income increased by 7.1% when compared to the same quarter one year prior, going from $51.81 million to $55.47 million.
- Net operating cash flow has increased to $156.39 million or 18.33% when compared to the same quarter last year. Despite an increase in cash flow, UIL HOLDINGS CORP's average is still marginally south of the industry average growth rate of 18.42%.
- Even though the current debt-to-equity ratio is 1.25, it is still below the industry average, suggesting that this level of debt is acceptable within the Electric Utilities industry. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 0.72 is weak.
- You can view the full UIL Holdings Ratings Report.
- Our dividend calendar.