Today, we begin a 5-part special report from Bob Ciura — contributing editor of the industry-leading income advisory service, Sure Dividend — covering stocks that offer high yields and pay monthly dividends.
Monthly dividend stocks are appealing for two major reasons. First, monthly dividend stocks pay shareholders a dividend every month. This separates them from the vast majority of other stocks which pay dividends on a quarterly, annual, or semi-annual schedule. In addition, many monthly dividend stocks have high dividend yields above 5%. Some even high dividend yields above 10%.
Investors should always do their due diligence before buying individual stocks, especially when it comes to extreme high-yield stocks. But high-yield monthly dividend stocks like Ellington Financial (EFC) could be good candidates for further consideration. Ellington Financial has a 12% dividend yield, and the company currently generates enough earnings to cover the dividend.
Business Overview & Recent Events
Ellington Financial Inc. acquires and manages mortgage, consumer, corporate, and other related financial assets in the United States. The company acquires and manages residential mortgage-backed securities (RMBS) backed by prime jumbo, Alt-A, manufactured housing, and subprime residential mortgage loans.
Additionally, it manages RMBS, for which the U.S. government guarantees the principal and interest payments. It also provides collateralized loan obligations, mortgage-related and non-mortgage-related derivatives, equity investments in mortgage originators and other strategic investments.
In the 2021 fourth quarter, Ellington’s interest income came in at $41.6 million, 14.6% higher from the previous quarter. Most of the growth came from the loan origination businesses. Ellington’s total long credit portfolio expanded by 22% to $2.1 billion. Ellington’s book value per share increased from $18.35 to $18.39 during the quarter.
Dividend Analysis
The monthly dividend remains at $0.15 per share, for an annualized payout of $1.80 per share. We forecast FY2022 EPS at $1.83, stable from 2021. Therefore, the company pays out virtually all of its earnings to shareholders. This is feasible, assuming that the earnings do not fall from current levels. With a payout ratio near 100%, there is little room for error. However, the dividend can continue to be supported at the current level of earnings.
Fortunately, the company has designed its investment portfolio to not be overly vulnerable to fluctuations in interest rates. For example, 75% of its RMBS exposure is allocated to 30-year fixed mortgages. Additionally, while around 65% of its credit portfolio is invested in residential mortgages, that 65% is split among many different securities types (non-QM, Reverse mortgages, Real-estate-owned loans etc.).
At Ellington’s current portfolio construction, a 50 basis-point decline in interest rates would result in $2.0 million in gains (i.e., - 0.16% of equity), while a similar increase in rates would result in losses of $9.5 million (0.72% of equity). Ellington has designed its portfolio in such a way that these inevitable movements in rates over time won’t have a major impact on its overall portfolio.
Final Thoughts
Since its IPO, Ellington Financial has paid cumulative dividends in excess of $28 per share, which is almost double its current share price. Therefore, it has been a strong income holding for its investors. While investors will need to closely monitor the company’s portfolio to make sure rising rates do not bring down earnings, the dividend appears safe in the current environment and is very attractive at 12.0%.
