Most stocks that pay dividends, do so on a quarterly basis; some companies pay dividends on a semi-annual or annual schedule. But for investors looking for more frequent payouts, monthly dividend stocks may be appealing, asserts Bob Ciura, contributing editor of Sure Dividend.
For example, Ellington Residential Mortgage REIT (EARN) has a 12.5% dividend yield, and it makes dividend payments each month. With a dividend yield this high, investors should assess whether the dividend is sustainable.
Business Overview & Recent Events
As its name suggests, Ellington Residential Mortgage REIT acquires, invests in, and manages residential mortgage and real estate-related assets. Ellington focuses primarily on residential mortgage-backed securities, specifically those backed by a U.S. Government agency or U.S. government-sponsored enterprise.
In this way, Ellington Residential differs from most other REITs. The typical REIT owns physical properties and leases those properties to tenants. Ellington Residential does not invest in physical properties.
Ellington Residential is a micro-cap, with a market capitalization just under $100 million. Investors should consider the unique risks and characteristics of micro-cap stocks, which are typically thinly traded and can be prone to greater volatility.
The mortgage REIT has an agency residential mortgage-backed securities (RMBS) portfolio of $1.1 billion and a non-agency RMBS portfolio of $8.7 million. Agency MBS are created and backed by government agencies or enterprises, while non-agency MBS are not guaranteed by the government.
Ellington Residential has a few avenues of growth, which all revolve around optimizing their MBS portfolio. Capitalizing on opportunities driven by market volatility, particularly around the rate hiking cycle and quantitative tightening, could also yield results.
Additionally, Ellington will protect their book value and manage volatility through interest rate hedges and liquidity management, which they have ramped up at the start of 2022. Generating growth will be important for the company’s ability to maintain its high dividend payout.
Dividend Analysis
Ellington Residential stock currently yields 12.5%. Stocks with double-digit yields often have fluctuating dividend payouts, and Ellington Residential is no different. The company recently reduced its dividend by 20% to the current level. Of course, the stock still yields 12.5% so it remains an extremely high yielder, even with the reduction.
The current dividend appears to be covered with underlying earnings. On May 2nd, 2022, Ellington Residential reported its first-quarter results. Core earnings of $3.9 million this quarter led to core EPS of $0.30 per share, which covered the dividend paid in the period.
EARN achieved a net interest margin of 1.76% in Q1. At quarter end, Ellington had $29.9 of cash, cash equivalents, and other liquidity, and $11.3 million of other unencumbered assets. The debt-to-equity ratio was 9.1x. Book value per share declined from the prior quarter to $10.14, a 14% decrease.
With a current annualized dividend of $0.96 per share against expected core EPS of $1.22 for 2022, EARN has a projected dividend payout ratio of 79%. This implies the dividend is covered, assuming core EPS remains steady or grows. We rate the stock as a speculative buy due to its attractive total return potential alongside an unreliable dividend.
