3 Hold-Rated Dividend Stocks: ZFC, ASEI, RWT

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: 11.10%

ZAIS Financial (NYSE: ZFC) shares currently have a dividend yield of 11.10%.

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 44,300 shares per day over the past 30 days. ZAIS Financial has a market cap of $114.9 million and is part of the real estate industry. Shares are down 4.4% year-to-date as of the close of trading on Thursday.

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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 5.0%. 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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American Science & Engineering

Dividend Yield: 7.20%

American Science & Engineering (NASDAQ: ASEI) shares currently have a dividend yield of 7.20%.

American Science and Engineering, Inc., together with its subsidiaries, develops, manufactures, markets, and sells X-ray inspection and other detection products for homeland security, force protection, public safety, and other defense and security applications in the US and internationally. The company has a P/E ratio of 559.20.

The average volume for American Science & Engineering has been 110,500 shares per day over the past 30 days. American Science & Engineering has a market cap of $200.5 million and is part of the electronics industry. Shares are down 31.9% year-to-date as of the close of trading on Thursday.

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TheStreet Ratings rates American Science & Engineering as a hold. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, feeble growth in the company's earnings per share and deteriorating net income.

Highlights from the ratings report include:
  • ASEI has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 2.97, which clearly demonstrates the ability to cover short-term cash needs.
  • The gross profit margin for AMERICAN SCIENCE ENGINEERING is rather high; currently it is at 53.28%. 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 -2.09% trails the industry average.
  • The revenue fell significantly faster than the industry average of 2.8%. Since the same quarter one year prior, revenues fell by 40.0%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • AMERICAN SCIENCE ENGINEERING 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. Earnings per share have declined over the last two years. We anticipate that this should continue in the coming year. During the past fiscal year, AMERICAN SCIENCE ENGINEERING reported lower earnings of $0.13 versus $1.92 in the prior year. For the next year, the market is expecting a contraction of 115.4% in earnings (-$0.02 versus $0.13).
  • 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 Aerospace & Defense industry. The net income has significantly decreased by 118.2% when compared to the same quarter one year ago, falling from $2.55 million to -$0.46 million.

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Redwood

Dividend Yield: 8.70%

Redwood (NYSE: RWT) shares currently have a dividend yield of 8.70%.

Redwood Trust, Inc., together with its subsidiaries, focuses on investing in mortgage- and other real estate-related assets; and engaging in residential and commercial mortgage banking activities in the United States. The company has a P/E ratio of 10.86.

The average volume for Redwood has been 607,500 shares per day over the past 30 days. Redwood has a market cap of $989.6 million and is part of the real estate industry. Shares are down 3.4% year-to-date as of the close of trading on Thursday.

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TheStreet Ratings rates Redwood as a hold. 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. 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:
  • RWT's revenue growth has slightly outpaced the industry average of 5.0%. Since the same quarter one year prior, revenues slightly increased by 5.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • REDWOOD TRUST INC has improved earnings per share by 48.4% 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. This trend suggests that the performance of the business is improving. During the past fiscal year, REDWOOD TRUST INC increased its bottom line by earning $1.15 versus $1.13 in the prior year. This year, the market expects an improvement in earnings ($1.34 versus $1.15).
  • 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 Real Estate Investment Trusts (REITs) industry and the overall market, REDWOOD TRUST INC's return on equity is below that of both the industry average and the S&P 500.
  • RWT'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 27.99%, 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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