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 9.70%. Zais Financial Corp. invests in, finances, and manages performing and re-performing residential mortgage loans. The company also invests in, finances, and manages residential mortgage-backed securities (RMBS) that are not issued or guaranteed by a federally chartered corporation. The company has a P/E ratio of 18.60. The average volume for ZAIS Financial has been 60,200 shares per day over the past 30 days. ZAIS Financial has a market cap of $131.0 million and is part of the real estate industry. Shares are up 2.1% year-to-date as of the close of trading on Tuesday. 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 5.66% 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. Regardless of the strong results of the gross profit margin, the net profit margin of 23.42% trails the industry average.
- Net operating cash flow has significantly increased by 1192.24% to $1.67 million when compared to the same quarter last year. In addition, ZAIS FINANCIAL CORP has also vastly surpassed the industry average cash flow growth rate of -58.18%.
- You can view the full ZAIS Financial Ratings Report.