NEW YORK (TheStreet) -- Small-cap stocks with large dividends may look enticing but not every stock is a buy.
In stock picking, dividend yield is just one factor among many that investors should consider. The stocks on this list are all small-cap companies rated sell with D+ ratings or worse, yet have high dividend yields, according to TheStreet Ratings, TheStreet's proprietary ratings tool.
TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Check out which small-cap high-dividend yielding stocks you should stay away from. And when you're done be sure to read about which large-cap stocks with big dividends you should also sell. Year-to-date returns are based on March 26, 2015 closing prices.
1. Institutional Financial Markets (IFMI)
Rating: Sell, D
Industry: Financial Services/Diversified Capital Markets
Market Cap: $23.2 million
Annual Dividend Yield: 5.03%
Year-to-date return: -9.7%
Institutional Financial Markets, Inc. is a publicly owned investment manager. The firm primarily provides its services to individuals and institutions. It manages separate client-focused fixed income portfolios. Institutional Financial Markets, Inc.
"We rate INSTITUTIONAL FINANCIAL MKTS (IFMI) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its generally disappointing historical performance in the stock itself and poor profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- IFMI's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 26.05%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
- The gross profit margin for INSTITUTIONAL FINANCIAL MKTS is currently lower than what is desirable, coming in at 25.19%. Despite the low profit margin, it has increased significantly from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 16.26% trails the industry average.
- The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Capital Markets industry and the overall market, INSTITUTIONAL FINANCIAL MKTS's return on equity significantly trails that of both the industry average and the S&P 500.
- INSTITUTIONAL FINANCIAL MKTS reported significant earnings per share improvement 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. During the past fiscal year, INSTITUTIONAL FINANCIAL MKTS continued to lose money by earning -$0.17 versus -$1.09 in the prior year.
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Capital Markets industry. The net income increased by 172.1% when compared to the same quarter one year prior, rising from -$4.01 million to $2.89 million.
- You can view the full analysis from the report here: IFMI Ratings Report