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."

International Paper

Dividend Yield: 4.80%

International Paper (NYSE: IP) shares currently have a dividend yield of 4.80%.

International Paper Company operates as a paper and packaging company in North America, Europe, Latin America, Russia, Asia, Africa, and the Middle East. The company operates through three segments: Industrial Packaging, Printing Papers, and Consumer Packaging. The company has a P/E ratio of 17.20.

The average volume for International Paper has been 3,256,100 shares per day over the past 30 days. International Paper has a market cap of $15.3 billion and is part of the consumer non-durables industry. Shares are down 30.4% year-to-date as of the close of trading on Monday.

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TheStreet Ratings rates International Paper as a buy. Among the primary strengths of the company is its respectable return on equity which we feel is likely to continue. 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 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. Compared to other companies in the Paper & Forest Products industry and the overall market, INTL PAPER CO's return on equity exceeds that of both the industry average and the S&P 500.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 11.7%. Since the same quarter one year prior, revenues slightly dropped by 5.9%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • INTL PAPER CO's earnings per share declined by 32.9% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, INTL PAPER CO reported lower earnings of $1.33 versus $3.81 in the prior year. This year, the market expects an improvement in earnings ($3.67 versus $1.33).
  • The change in net income from the same quarter one year ago has exceeded that of the Paper & Forest Products industry average, but is less than that of the S&P 500. The net income has significantly decreased by 38.0% when compared to the same quarter one year ago, falling from $355.00 million to $220.00 million.
  • Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 29.45%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 32.91% compared to the year-earlier quarter. Looking ahead, the stock's sharp decline over the past year may have been what was needed in order to bring its value into alignment with its fundamentals and others in its industry.

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Pepco Holdings

Dividend Yield: 4.20%

Pepco Holdings (NYSE: POM) shares currently have a dividend yield of 4.20%.

Pepco Holdings, Inc., through its subsidiaries, engages in the transmission, distribution, and supply of electricity. The company also distributes and supplies natural gas. The company has a P/E ratio of 28.09.

The average volume for Pepco Holdings has been 2,070,400 shares per day over the past 30 days. Pepco Holdings has a market cap of $6.6 billion and is part of the utilities industry. Shares are down 4% year-to-date as of the close of trading on Monday.

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TheStreet Ratings rates Pepco Holdings as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share and increase in net income. 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:
  • POM's revenue growth has slightly outpaced the industry average of 0.6%. Since the same quarter one year prior, revenues slightly increased by 3.7%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • PEPCO HOLDINGS INC has improved earnings per share by 16.1% 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, PEPCO HOLDINGS INC increased its bottom line by earning $0.96 versus $0.41 in the prior year. This year, the market expects an improvement in earnings ($1.10 versus $0.96).
  • 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 Electric Utilities industry average. The net income increased by 15.2% when compared to the same quarter one year prior, going from $79.00 million to $91.00 million.
  • After a year of stock price fluctuations, the net result is that POM's price has not changed very much. Although its weak earnings growth may have played a role in this flat result, don't lose sight of the fact that the performance of the overall market, as measured by the S&P 500 Index, was essentially similar. Despite the decline in its share price over the last year, this stock is still more expensive (when compared to its current earnings) than most other companies in its industry. We feel, however, that other strengths this company displays compensate for this.
  • The debt-to-equity ratio of 1.43 is relatively high when compared with the industry average, suggesting a need for better debt level management. To add to this, POM has a quick ratio of 0.53, this demonstrates the lack of ability of the company to cover short-term liquidity needs.

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Realty Income

Dividend Yield: 4.50%

Realty Income (NYSE: O) shares currently have a dividend yield of 4.50%.

Realty Income Corporation is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. The firm makes investments in commercial real estate. Realty Income Corporation was founded in 1969 and is based in Escondido, California. The company has a P/E ratio of 46.86.

The average volume for Realty Income has been 2,364,600 shares per day over the past 30 days. Realty Income has a market cap of $12.7 billion and is part of the real estate industry. Shares are up 7.1% year-to-date as of the close of trading on Monday.

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TheStreet Ratings rates Realty Income as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, expanding profit margins, 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:
  • O's revenue growth has slightly outpaced the industry average of 6.1%. Since the same quarter one year prior, revenues slightly increased by 9.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displaying stagnant earnings per share.
  • REALTY INCOME CORP reported flat earnings per share in the most recent quarter. 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, REALTY INCOME CORP increased its bottom line by earning $1.02 versus $0.71 in the prior year. This year, the market expects an improvement in earnings ($1.04 versus $1.02).
  • Net operating cash flow has slightly increased to $151.24 million or 7.02% when compared to the same quarter last year. Despite an increase in cash flow, REALTY INCOME CORP's average is still marginally south of the industry average growth rate of 9.44%.
  • The gross profit margin for REALTY INCOME CORP is rather high; currently it is at 52.97%. Regardless of O's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 26.06% trails the industry average.
  • 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. 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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