Buy-Rated Dividend Stocks In The Top 3: MO, MCY, KKR

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."

Altria Group

Dividend Yield: 4.20%

Altria Group (NYSE: MO) shares currently have a dividend yield of 4.20%.

Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States and internationally. The company has a P/E ratio of 19.86.

The average volume for Altria Group has been 6,828,700 shares per day over the past 30 days. Altria Group has a market cap of $97.3 billion and is part of the tobacco industry. Shares are up 0.1% year-to-date as of the close of trading on Friday.

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TheStreet Ratings rates Altria Group as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, expanding profit margins, good cash flow from operations and solid stock price performance. We feel its strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated.

Highlights from the ratings report include:
  • The revenue growth came in higher than the industry average of 23.1%. Since the same quarter one year prior, revenues slightly increased by 6.6%. 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.
  • 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 Tobacco industry and the overall market, ALTRIA GROUP INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • The gross profit margin for ALTRIA GROUP INC is rather high; currently it is at 58.97%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 23.82% is above that of the industry average.
  • Net operating cash flow has increased to $2,498.00 million or 17.55% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -31.96%.
  • ALTRIA GROUP INC's earnings per share declined by 11.9% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ALTRIA GROUP INC increased its bottom line by earning $2.57 versus $2.26 in the prior year. This year, the market expects an improvement in earnings ($2.80 versus $2.57).

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Mercury General

Dividend Yield: 4.40%

Mercury General (NYSE: MCY) shares currently have a dividend yield of 4.40%.

Mercury General Corporation, together with its subsidiaries, writes personal automobile insurance. The company also writes homeowners, commercial automobile, commercial property, mechanical breakdown, fire, and umbrella insurance. The company has a P/E ratio of 23.70.

The average volume for Mercury General has been 213,000 shares per day over the past 30 days. Mercury General has a market cap of $3.1 billion and is part of the insurance industry. Shares are up 0.9% year-to-date as of the close of trading on Friday.

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TheStreet Ratings rates Mercury General 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, solid stock price performance and notable return on equity. We feel its strengths outweigh the fact that the company has had sub par growth in net income.

Highlights from the ratings report include:
  • MCY's debt-to-equity ratio is very low at 0.16 and is currently below that of the industry average, implying that there has been very successful management of debt levels.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 9.5%. Since the same quarter one year prior, revenues slightly dropped by 2.4%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Insurance industry and the overall market, MERCURY GENERAL CORP's return on equity is below that of both the industry average and the S&P 500.
  • MERCURY GENERAL 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, MERCURY GENERAL CORP increased its bottom line by earning $3.24 versus $2.04 in the prior year. For the next year, the market is expecting a contraction of 25.9% in earnings ($2.40 versus $3.24).

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KKR

Dividend Yield: 8.00%

KKR (NYSE: KKR) shares currently have a dividend yield of 8.00%.

KKR & Co. L.P. is a private equity and real estate investment firm specializing in direct and fund of fund investments. It specializes in acquisitions, leveraged buyouts, management buyouts, credit special situations, growth equity, mature, mezzanine, distressed, and middle market investments. The company has a P/E ratio of 21.31.

The average volume for KKR has been 2,155,500 shares per day over the past 30 days. KKR has a market cap of $10.2 billion and is part of the financial services industry. Shares are down 0.9% year-to-date as of the close of trading on Friday.

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TheStreet Ratings rates KKR as a buy. The company's strengths can be seen in multiple areas, such as its increase in net income, revenue growth, attractive valuation levels, good cash flow from operations and expanding profit margins. We feel its strengths outweigh the fact that the company has had lackluster performance in the stock itself.

Highlights from the ratings report include:
  • The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Capital Markets industry average. The net income increased by 28.8% when compared to the same quarter one year prior, rising from $210.04 million to $270.51 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 5.7%. Since the same quarter one year prior, revenues slightly increased by 2.1%. 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.
  • Net operating cash flow has significantly increased by 204.42% to $943.37 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 191.30%.
  • The gross profit margin for KKR & CO LP is currently very high, coming in at 80.50%. Regardless of KKR's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, KKR's net profit margin of 10.45% is significantly lower than the industry average.

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