3 Hold-Rated Dividend Stocks: ZFC, PNNT, RAS

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 "Hold."

ZAIS Financial

Dividend Yield: 10.80%

ZAIS Financial (NYSE: ZFC) shares currently have a dividend yield of 10.80%.

ZAIS Financial Corp. invests in residential mortgage loans in the United States. The company operates in two segments, Residential Mortgage Investments and Residential Mortgage Banking.

The average volume for ZAIS Financial has been 37,800 shares per day over the past 30 days. ZAIS Financial has a market cap of $117.7 million and is part of the real estate industry. Shares are down 2.2% year-to-date as of the close of trading on Wednesday.

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TheStreet Ratings rates ZAIS Financial as a hold. The company's strengths can be seen in multiple areas, such as its robust revenue growth and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and weak operating cash flow.

Highlights from the ratings report include:
  • The revenue growth greatly exceeded the industry average of 8.1%. Since the same quarter one year prior, revenues rose by 46.9%. 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.
  • 39.07% is the gross profit margin for ZAIS FINANCIAL CORP which we consider to be strong. Regardless of ZFC's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, ZFC's net profit margin of -7.48% significantly underperformed when compared to the industry average.
  • 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. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, ZAIS FINANCIAL CORP swung to a loss, reporting -$0.27 versus $2.91 in the prior year. This year, the market expects an improvement in earnings ($1.40 versus -$0.27).
  • 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 949.5% when compared to the same quarter one year ago, falling from $0.19 million to -$1.65 million.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Real Estate Investment Trusts (REITs) industry and the overall market, ZAIS FINANCIAL CORP's return on equity significantly trails that of both the industry average and the S&P 500.

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Pennant Park Investment

Dividend Yield: 17.40%

Pennant Park Investment (NASDAQ: PNNT) shares currently have a dividend yield of 17.40%.

PennantPark Investment Corporation is a publicly listed business development firm specializing in direct and mezzanine investments in middle market companies. It invests in the form of mezzanine debt, senior secured loans, and equity investments. The company has a P/E ratio of 3.87.

The average volume for Pennant Park Investment has been 327,900 shares per day over the past 30 days. Pennant Park Investment has a market cap of $461.3 million and is part of the financial services industry. Shares are up 6.3% year-to-date as of the close of trading on Tuesday.

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TheStreet Ratings rates Pennant Park Investment as a hold. The company's strengths can be seen in multiple areas, such as its good cash flow from operations and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and a generally disappointing performance in the stock itself.

Highlights from the ratings report include:
  • Net operating cash flow has significantly increased by 98.60% to -$0.86 million when compared to the same quarter last year. In addition, PENNANTPARK INVESTMENT CORP has also vastly surpassed the industry average cash flow growth rate of -2.34%.
  • The gross profit margin for PENNANTPARK INVESTMENT CORP is rather high; currently it is at 66.81%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -115.57% is in-line with the industry average.
  • Despite the weak revenue results, PNNT has outperformed against the industry average of 22.6%. Since the same quarter one year prior, revenues fell by 10.1%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed against the S&P 500 and did not exceed that of the Capital Markets industry. The net income has significantly decreased by 70.2% when compared to the same quarter one year ago, falling from -$23.95 million to -$40.76 million.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Capital Markets industry and the overall market, PENNANTPARK INVESTMENT CORP's return on equity significantly trails that of both the industry average and the S&P 500.

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RAIT Financial

Dividend Yield: 12.40%

RAIT Financial (NYSE: RAS) shares currently have a dividend yield of 12.40%.

RAIT Financial Trust operates as a self-managed and self-advised real estate investment trust (REIT). The company, through its subsidiaries, invests in, manages, and services real estate-related assets with a focus on commercial real estate. The company has a P/E ratio of 36.38.

The average volume for RAIT Financial has been 719,100 shares per day over the past 30 days. RAIT Financial has a market cap of $266.7 million and is part of the real estate industry. Shares are up 15.6% year-to-date as of the close of trading on Tuesday.

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TheStreet Ratings rates RAIT Financial as a hold. The company's strengths can be seen in multiple areas, such as its revenue growth, compelling growth in net income and reasonable valuation levels. However, as a counter to these strengths, we find that the stock has had a generally disappointing performance in the past year.

Highlights from the ratings report include:
  • The revenue growth came in higher than the industry average of 8.1%. Since the same quarter one year prior, revenues rose by 23.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • 38.94% is the gross profit margin for RAIT FINANCIAL TRUST which we consider to be strong. Regardless of RAS's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, RAS's net profit margin of 10.16% is significantly lower than 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 Real Estate Investment Trusts (REITs) industry and the overall market, RAIT FINANCIAL TRUST's return on equity significantly trails that of both the industry average and the S&P 500.
  • RAS'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 57.78%, 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.

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