3 Sell-Rated Dividend Stocks: ZFC, OAKS, CIO

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 "Sell."

ZAIS Financial

Dividend Yield: 9.40%

ZAIS Financial (NYSE: ZFC) shares currently have a dividend yield of 9.40%.

Zais Financial Corp. originates, acquires, finances, sells, services, and manages residential mortgage loans in the United States. It originates mortgage loans through its GMFS mortgage banking platform; and acquires performing, re-performing, and newly originated loans through other channels. The company has a P/E ratio of 5.46.

The average volume for ZAIS Financial has been 20,100 shares per day over the past 30 days. ZAIS Financial has a market cap of $135.9 million and is part of the real estate industry. Shares are down 1.3% year-to-date as of the close of trading on Tuesday.

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TheStreet Ratings rates ZAIS Financial as a sell. The company's weaknesses can be seen in multiple areas, such as its unimpressive growth in net income, weak operating cash flow and feeble growth in its earnings per share.

Highlights from the ratings report include:
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Real Estate Investment Trusts (REITs) industry. The net income has significantly decreased by 83.2% when compared to the same quarter one year ago, falling from $2.22 million to $0.37 million.
  • Net operating cash flow has significantly decreased to -$30.09 million or 1904.73% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • ZAIS FINANCIAL CORP has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, ZAIS FINANCIAL CORP increased its bottom line by earning $2.91 versus $0.81 in the prior year. For the next year, the market is expecting a contraction of 31.3% in earnings ($2.00 versus $2.91).
  • In its most recent trading session, ZFC has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Turning our attention to the future direction of the stock, we do not believe this stock offers ample reward opportunity to compensate for the risks, despite the fact that it rose over the past year.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 8.5%. Since the same quarter one year prior, revenues slightly increased by 2.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.

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Five Oaks Investment

Dividend Yield: 16.60%

Five Oaks Investment (NYSE: OAKS) shares currently have a dividend yield of 16.60%.

Five Oaks Investment Corp. focuses on investing, financing, and managing a portfolio of mortgage-backed securities (MBS). It invests in agency and non-agency residential MBS, multi-family MBS, residential mortgage loans, mortgage servicing rights, and other mortgage-related investments.

The average volume for Five Oaks Investment has been 102,100 shares per day over the past 30 days. Five Oaks Investment has a market cap of $132.6 million and is part of the real estate industry. Shares are down 16.6% year-to-date as of the close of trading on Tuesday.

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TheStreet Ratings rates Five Oaks Investment as a sell. The company's weaknesses can be seen in multiple areas, such as its unimpressive growth in net income, disappointing return on equity, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.

Highlights from the ratings report include:
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Real Estate Investment Trusts (REITs) industry. The net income has significantly decreased by 101.9% when compared to the same quarter one year ago, falling from -$2.54 million to -$5.13 million.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Real Estate Investment Trusts (REITs) industry and the overall market, FIVE OAKS INVESTMENT CORP's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has decreased to $2.25 million or 20.92% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, OAKS has underperformed the S&P 500 Index, declining 21.52% 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.
  • FIVE OAKS INVESTMENT CORP's earnings per share declined by 20.6% in the most recent quarter compared to the same quarter a year ago. The company has reported a trend of declining earnings per share over the past year. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, FIVE OAKS INVESTMENT CORP swung to a loss, reporting -$0.03 versus $0.42 in the prior year. This year, the market expects an improvement in earnings ($1.32 versus -$0.03).

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City Office REIT

Dividend Yield: 7.60%

City Office REIT (NYSE: CIO) shares currently have a dividend yield of 7.60%.

City Office REIT, Inc is an equity real estate investment trust. The fund invests in the real estate markets of the United States. It acquires, own and operate high-quality office properties. City Office REIT, Inc was formed in November 26, 2013 and is domiciled in the United States.

The average volume for City Office REIT has been 32,000 shares per day over the past 30 days. City Office REIT has a market cap of $153.4 million and is part of the real estate industry. Shares are down 3.4% year-to-date as of the close of trading on Tuesday.

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TheStreet Ratings rates City Office REIT as a sell. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, poor profit margins and feeble growth in its earnings per share.

Highlights from the ratings report include:
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Real Estate Investment Trusts (REITs) industry. The net income has significantly decreased by 133.6% when compared to the same quarter one year ago, falling from $2.21 million to -$0.74 million.
  • The gross profit margin for CITY OFFICE REIT INC is currently extremely low, coming in at 12.25%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of -6.59% is significantly below that of the industry average.
  • CITY OFFICE REIT INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This year, the market expects earnings to be in line with last year (-$0.32 versus -$0.32).
  • In its most recent trading session, CIO has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Regardless of the rise in share value over the previous year, we feel that the risks involved in investing in this stock do not compensate for any future upside potential.
  • Compared to other companies in the Real Estate Investment Trusts (REITs) industry and the overall market, CITY OFFICE REIT INC's return on equity significantly trails that of both the industry average and the S&P 500.

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