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." American Electric Power (NYSE: AEP) shares currently have a dividend yield of 4.10%. American Electric Power Company, Inc., a public utility holding company, is engaged in the generation, transmission, and distribution of electricity for sale to retail and wholesale customers. The company has a P/E ratio of 13.88. The average volume for American Electric Power has been 2,674,300 shares per day over the past 30 days. American Electric Power has a market cap of $24.1 billion and is part of the utilities industry. Shares are up 6.6% year-to-date as of the close of trading on Thursday. TheStreet Ratings rates American Electric Power as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in stock price during the past year, impressive record of earnings per share growth, compelling growth in net income and good cash flow from operations. We feel these strengths outweigh the fact that the company shows low profit margins. Highlights from the ratings report include:
- AEP's revenue growth has slightly outpaced the industry average of 5.7%. Since the same quarter one year prior, revenues rose by 12.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. 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.
- AMERICAN ELECTRIC POWER CO has improved earnings per share by 15.9% 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. During the past fiscal year, AMERICAN ELECTRIC POWER CO increased its bottom line by earning $3.04 versus $2.60 in the prior year. This year, the market expects an improvement in earnings ($3.50 versus $3.04).
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Electric Utilities industry average. The net income increased by 15.4% when compared to the same quarter one year prior, going from $338.00 million to $390.00 million.
- Net operating cash flow has increased to $1,064.00 million or 40.00% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 7.84%.
- You can view the full American Electric Power Ratings Report.