Monthly dividend stocks may be appealing for investors who are not afraid to accept higher risk, cautions Bob Ciura, contributing editor of Sure Dividend.

Many monthly dividend stocks have extremely high yields. This makes them susceptible to dividend reductions during economic downturns, but their high yields and monthly dividends are attractive for income investors.

For example, ARMOUR Residential REIT (ARR) has a 16.4% dividend yield, and it makes dividend payments each month. With a dividend yield this high, investors should assess whether the dividend is sustainable.

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Business Overview & Recent Events

ARMOUR Residential is a mortgage REIT that was formed in 2008. The trust invests primarily in residential mortgage-backed securities that are guaranteed or issued by a United States government entity including Fannie Mae, Freddie Mac and Ginnie Mae. ARMOUR has a $750 million market capitalization and produces about $160 million in net revenues.

ARMOUR reported Q1 results on April 27th, 2022. The trust’s net interest income stood at $30.9 million. Liquidity including cash and unencumbered securities amounted to $628.3 million with $8.48 in book value per common share at quarter end. Q1 distributable earnings per share stood at 28 cents while the debt-to-equity ratio stood at 6.3-to-1 and leverage, including TBA Securities stood at 7.0-1.

Meanwhile, net interest margin increased to 1.78%, up 3 basis points quarter-over-quarter. Portfolio composition was 85% agency mortgage-backed securities, including TBA securities. Comprehensive loss stood at $(148) million, representing (60%) annualized return based on stockholder’s equity at the beginning of the quarter. Finally, interest rate swap contracts amounted to $7.4 billion which represents 103% of total repurchase agreement and TBA Securities liabilities.

ARMOUR’s cash flow has been volatile since its inception in 2008, but this has generally been true across the mortgage REIT industry. The coronavirus pandemic was another challenge the company encountered over the past two years. These factors led to a pronounced drop in cash flow, which then resulted in a dividend cut.

Fortunately, the company is on better footing, with a recovery in the past few quarters. Going forward, the continued recovery from the pandemic conditions could bring a return to growth. This will be important to the company being able to sustain its dividend payout.

Dividend Analysis

ARMOUR’s quality metrics have been volatile given the performance of the trust as rates have moved around over the years. Gross margins have moved down since short-term rates began to rise meaningfully a couple of years ago, while balance sheet leverage had been moving down slightly, though it saw an uptick again this past quarter. Interest coverage has declined with spreads but also appears to have stabilized, although there is always potential for volatility.

ARMOUR currently pays an annualized dividend of $1.20 per share, while the company is expected to produce $1 of earnings-per-share in 2022. This means the dividend payout ratio is 120%, a sign that the current dividend payout is not sustainable. Indeed, the company has cut the dividend previously on multiple occasions.

That said, even a steep cut from current levels would still provide a compelling yield, as the stock currently yields over 16%. ARMOUR has a shaky track record since its inception, but the company does have some positives including prudent leverage and a management team that does not chase unprofitable growth.

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