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 9.90%. 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 18.43. The average volume for ZAIS Financial has been 40,600 shares per day over the past 30 days. ZAIS Financial has a market cap of $129.3 million and is part of the real estate industry. Shares are up 0.6% year-to-date as of the close of trading on Thursday. TheStreet Ratings rates ZAIS Financial as a sell. Among the areas we feel are negative, one of the most important has been a generally disappointing historical performance in the stock itself. Highlights from the ratings report include:
- ZFC has underperformed the S&P 500 Index, declining 18.28% from its price level of one year ago. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
- When compared to other companies in the Real Estate Investment Trusts (REITs) industry and the overall market, ZAIS FINANCIAL CORP's return on equity is below that of both the industry average and the S&P 500.
- The gross profit margin for ZAIS FINANCIAL CORP is rather high; currently it is at 56.82%. It has increased significantly from the same period last year. Along with this, the net profit margin of 23.42% is above that of the industry average.
- ZAIS FINANCIAL CORP has improved earnings per share by 33.3% 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 year. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, ZAIS FINANCIAL CORP increased its bottom line by earning $0.81 versus $0.23 in the prior year. This year, the market expects an improvement in earnings ($1.48 versus $0.81).
- You can view the full ZAIS Financial Ratings Report.