Buy-Rated Dividend Stocks: Top 3 Companies: PNW, IRM, VGR

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

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."

Pinnacle West Capital

Dividend Yield: 4.10%

Pinnacle West Capital (NYSE: PNW) shares currently have a dividend yield of 4.10%.

Pinnacle West Capital Corporation, through its subsidiary, Arizona Public Service Company, provides retail and wholesale electric services primarily in the State of Arizona. It generates, transmits, and distributes electricity using coal, nuclear, gas, oil, and solar resources. The company has a P/E ratio of 16.15.

The average volume for Pinnacle West Capital has been 772,300 shares per day over the past 30 days. Pinnacle West Capital has a market cap of $6.4 billion and is part of the utilities industry. Shares are down 16.6% year-to-date as of the close of trading on Friday.

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TheStreet Ratings rates Pinnacle West Capital as a buy. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, increase in stock price during the past year and increase in net income. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity.

Highlights from the ratings report include:
  • The debt-to-equity ratio is somewhat low, currently at 0.84, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.18 is very weak and demonstrates a lack of ability to pay short-term obligations.
  • PINNACLE WEST CAPITAL CORP reported flat earnings per share in the most recent quarter. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, PINNACLE WEST CAPITAL CORP reported lower earnings of $3.58 versus $3.66 in the prior year. This year, the market expects an improvement in earnings ($3.85 versus $3.58).
  • PNW, with its decline in revenue, slightly underperformed the industry average of 2.6%. Since the same quarter one year prior, revenues slightly dropped by 2.2%. Weakness in the company's revenue seems to not be hurting the bottom line, shown by stable earnings per share.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.

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