Updated on August 26th, 2024 by Bob Ciura
Investors are often attracted to dividend paying stocks because of the income they produce. Dividend stocks provide income, even while the price of the stock can fluctuate.
There are some companies that pay monthly dividends, which provide more consistent cash flow for investors. There are nearly 80 stocks that pay a monthly dividend.
You can download our full list of monthly dividend paying stocks (along with price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the link below:
Ellington Financial Inc (EFC) is a Real Estate Investment Trust, or REIT, that pays a monthly dividend. Even better, the stock has a very high dividend yield of 11.7%.
However, such high-yielding stocks can be flashing a warning sign that the underlying business is facing challenges. Stocks with extremely high yields above 10% might disappoint investors with a dividend cut later on. Those “yield traps” should be avoided.
This article will examine Ellington Financial’s business model, prospects for growth, and the safety of its dividend.
Business Overview
Ellington Financial only transitioned into a REIT at the beginning of 2019. Prior to this, the trust was taxed as a partnership. It is now classified as a mortgage REIT.
Ellington Financial is a hybrid REIT, meaning that the trust is a combination of an equity REIT, which owns properties, and mortgage REITs, which invest in mortgage loans and mortgage-backed securities.
The mortgage-backed securities the company manages are backed by prime jumbo loans, Alt-A loans, manufactured housing loans, and subprime residential mortgage loans.
Ellington Financial has a market capitalization of about $1.1 billion. You can see a snapshot of Ellington’s investment portfolio in the image below:
Source: Investor Presentation
On August 6th, 2024, Ellington Financial reported its Q2 results for the period ending June 30th, 2024. Due to the nature company’s business model, Ellington doesn’t report revenue. Instead, it records only income.
For the quarter, gross interest income came in at $104.3 million, up 2.8% quarter-over-quarter. Adjusted (previously referred to as “core”) EPS came in at $0.33, five cents higher versus Q1-2024.
The rise was mainly due to higher interest income against stable interest expenses, offset by a higher share count. Ellington’s book value per share rose from $13.69 to $13.92 during the last three months.
Growth Prospects
Ellington’s EPS generation has been quite inconsistent over the past decade, as rates have mostly been decreasing over that time. As a result, its per-share dividend has also mostly been falling since 2015.
However, the company has done its best to diversify its portfolio and reduce its performance variance.
Additionally, its residential mortgage investments are diversified among many different security types (Non-QM, Reverse mortgages, REOs, etc.).
Ellington has taken steps not to concentrate its risk its portfolio, which improves economic return volatility.
Source: Investor Presentation
Ellington has designed its portfolio in such a way that movements in rates over time won’t have a major impact on its overall portfolio.
The Federal Reserve has stated it is likely to raise interest rates in the near future. EFC would benefit from declining interest rates.
At Ellington’s current portfolio construction, a 50 basis point decline in interest rates would result in $6.6 million in equity gains (i.e., 0.42 % of equity), while a 50bp increase in rates would also result in losses of $11.6million (-0.74% of equity).
Overall, we expect 1% annual EPS growth over the next five years for EFC.
Competitive Advantage & Recession Performance
Ellington does not possess any major competitive advantage, but one positive is that the balance sheet remains of high quality.
For instance, EFC’s recourse debt to equity ratio decreased to 1.8x in Q2, down from 2x at the end of 2023, due to a decline in borrowings on its smaller, but more highly levered Agency RMBS portfolio, and a drop in its recourse borrowings related to its securitization of proprietary reverse mortgage loans.
In regards to recession performance, Ellington Financial was not a public company in the Great Recession, but the company’s share price was decimated at the onset of the COVID-19 pandemic.
EFC’s earnings and dividend have recovered since the pandemic ended, but both measures remain below levels seen in 2014.
Dividend Analysis
Ellington Financial has a volatile dividend history, with multiple reductions followed by increases. The company cut its monthly dividend from $0.15 to $0.08 in Q1 2020 due to the pandemic, but management has increased it several times since then.
In Q4-2023, EFC cut the dividend from a monthly rate of $0.15 to $0.13, which the board approved to build some equity value. Currently, EFC has an annualized dividend payout of $1.56 per share.
This is a problematic sign for the dividend’s safety and therefore the company’s DPS should not be seen as safe for the time being.
With a yield above 10%, the stock is certainly attractive for income investors, although a high level of volatility is to be expected.
Since its IPO, the company has paid cumulative dividends in excess of $30/share, which works out to more than 2x its current share price. Therefore, it has delivered a solid income stream to its shareholders over the years.
Final Thoughts
High-yield dividend stocks always need to be considered carefully as the elevated yield is often a warning sign of fundamental deterioration.
In the case of Ellington Financial, this seems to be the case, as the company has exhibited a great deal of volatility in its dividend payments.
The trust has a diversified loan portfolio and has proven successful at increasing its profitability over time. Ellington Financial’s dividend yield also looks safe for now, though another cut could be possible, if the trust were to see a slowdown in its business.
EFC has an attractive yield above 11%, but the stock carries an elevated level of risk.
Additional Reading
Don’t miss the resources below for more monthly dividend stock investing research.
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Cheapest Monthly Dividend Stocks
- 10 Safest Monthly Dividend Stocks
- 3 Top ‘Hold Forever’ Monthly Dividend Stocks
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
- Dividend Kings: 50+ years of rising dividends
- Dividend Champions: 25+ years of rising dividends
- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 4%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more