Ellington Credit Company (EARN): A High-Yield Dividend Stock with a Strategic Shift to CLOs - InvestingChannel

Ellington Credit Company (EARN): A High-Yield Dividend Stock with a Strategic Shift to CLOs

We recently compiled a list of 10 Highest Paying Monthly Dividend Stocks. In this article, we are going to take a look at where Ellington Credit Company (NYSE:EARN) stands against the other high paying monthly dividend stocks.

Dividend stocks have consistently been popular with investors, regardless of how often they are distributed. However, when considering the frequency of these payments, it’s clear that companies carefully decide how often to reward their shareholders. While many large companies prefer to issue dividends quarterly for convenience, others provide monthly dividends, which some investors find more appealing. After all, who wouldn’t appreciate a steady stream of passive income each month? Nevertheless, history indicates that companies offering monthly dividends tend to have higher yields but often lack stable dividend policies.

Dividend stocks have consistently played a crucial role in the market’s overall returns. Since 1960, reinvested dividends and the power of compounding have accounted for 85% of the cumulative total return of the market, according to a report by Hartford Funds. The report further mentioned a broader view of these returns and highlighted that from 1940 to 2023, dividend income contributed an average of 34% to the total return of the broader market. The performance of dividend stocks during this period varied depending on market conditions. According to a report by Hartford Funds, during the 1970s—a decade marked by high inflation and sluggish economic growth—dividends accounted for 70% of total returns.

Also read: 10 Extreme Dividend Stocks With Upside Potential.

Among dividend strategies, investors are primarily drawn to high yields because they signify that the stock offers a substantial return through dividends compared to its price. Focusing solely on yield can be misleading. Some companies maintain dividend payments even when their financial health is shaky, while others distribute dividends too aggressively, leaving insufficient profits to reinvest in their operations. A high dividend yield might actually signal a struggling business with a low share price. This is where dividend coverage becomes a crucial measure of a company’s ability to meet its dividend obligations. If that is not in line, the company is likely using past retained earnings to fund current dividends. This situation often precedes a dividend cut, which can severely impact the company’s valuation.

That said, high-yield dividend stocks can still maintain strong dividend policies if their business fundamentals are solid. Many companies with above-average yields have consistently paid and even increased dividends over the years. Research suggests that, over the long term, such stocks often deliver better results. For example, a study by the University of Nevada found that portfolios composed of the top 10 highest dividend yield stocks from the Dow 30 index outperformed those with medium and low dividend yields from 1987 to 2012. The study also noted that investing in high dividend yield stocks can be profitable in the long run, despite potential short-term fluctuations in returns. In view of this, we will analyze the highest-paying monthly dividend stocks in this article.

Our Methodology:

For this list, we looked at stocks that pay monthly dividends. Among them, we chose stocks with the highest dividend yields, which range from 11% to nearly 18% as of August 16. Most of these stocks are from the REIT and capital market sectors. REITs are obligated to distribute about 90% of their income to shareholders, which is good for income investors as it provides them with a reliable and substantial stream of dividends. However, it’s important to note that many of these stocks, despite their high yields, don’t have a consistent history of paying dividends and have experienced dividend reductions or pauses in the past. The stocks are ranked in ascending order of their dividend yields as of August 16.

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An aerial view of a residential building complex illuminated by a setting sun.

Ellington Credit Company (NYSE:EARN)

Dividend Yield as of August 16: 13.79%

Ellington Credit Company (NYSE:EARN) is an American capital market company. Formerly known as Ellington Residential, the company was originally established as a real estate investment trust (REIT) specializing in residential mortgage-backed securities. Earlier in March, the Board of Trustees approved a major shift in the company’s investment strategy to concentrate on corporate collateralized loan obligations (CLOs). As part of this transition, the company ended its REIT status and rebranded as Ellington Credit Company.

The new business model seems to be working for Ellington Credit Company (NYSE:EARN). In the second quarter of 2024, the company expanded its CLO portfolio to $85.1 million, up from $45.1 million at the end of the previous quarter. As of August 9, 2024, the CLO portfolio had grown to $108 million, accounting for approximately 50% of the capital allocation. The company aims to complete the strategic transformation by the end of the year. During the quarter, the company’s MBS portfolio incurred a modest net loss due to fluctuations in interest rates and spreads. This contributed to a slight overall net loss for the period. However, as the company progresses with its shift from MBS to CLOs, it has seen an expansion in its net interest margin and a reduction in leverage ratios.

Ellington Credit Company (NYSE:EARN) reported a strong cash position in the second quarter of 2024. The company’s cash and cash equivalents jumped to over $118.7 million, from $22.4 million in the previous quarter. It has paid uninterrupted dividends to shareholders since 2013, which makes it one of the best dividend stocks on our list. The company pays a monthly dividend of $0.08 per share and has a dividend yield of 13.79%, as of August 16.

Overall EARN ranks 6th on our list of the highest paying monthly dividend stocks. While we acknowledge the potential of EARN as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than EARN but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.

 

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

 

Disclosure: None. This article is originally published at Insider Monkey.

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