Buy-Rated Dividend Stocks In The Top 3: ALE, GEO, PPL

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

TheStreet Ratings' stock model projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Our Buy, Hold or Sell ratings designate how we expect these stocks to perform against a general benchmark of the equities market and interest rates.

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."

ALLETE

Dividend Yield: 4.10%

ALLETE (NYSE: ALE) shares currently have a dividend yield of 4.10%.

ALLETE, Inc., together with its subsidiaries, generates, transmits, and distributes electricity in the United States. It operates through Regulated Operations, and Investments and Other segments. The company generates electricity from coal, hydel, wind, and biomass. The company has a P/E ratio of 18.25.

The average volume for ALLETE has been 203,200 shares per day over the past 30 days. ALLETE has a market cap of $2.1 billion and is part of the utilities industry. Shares are down 3.2% year-to-date as of the close of trading on Monday.

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TheStreet Ratings rates ALLETE as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels and increase in net income. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity.

Highlights from the ratings report include:
  • ALE's revenue growth has slightly outpaced the industry average of 5.5%. Since the same quarter one year prior, revenues rose by 10.7%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • ALLETE INC has improved earnings per share by 14.3% 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. During the past fiscal year, ALLETE INC increased its bottom line by earning $2.63 versus $2.58 in the prior year. This year, the market expects an improvement in earnings ($2.88 versus $2.63).
  • The debt-to-equity ratio is somewhat low, currently at 0.94, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.78 is somewhat weak and could be cause for future problems.
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly underperformed compared to the Electric Utilities industry average, but is greater than that of the S&P 500. The net income increased by 20.0% when compared to the same quarter one year prior, going from $14.00 million to $16.80 million.

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

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