Published on July 16th, 2021 by Bob Ciura
Monthly dividend stocks are favored for their more frequent dividend payments compared with traditional quarterly dividend payers. Eagle Point Income Company (EIC) is a relatively new company that offers shareholders a monthly dividend payment.
There less than 60 stocks we cover that offer a monthly dividend. You can download our full list of monthly dividend paying stocks (along with important metrics such as price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the link below:
Eagle Point is also a high dividend stock with a yield of more than 6% based on the current share price. Considering the S&P 500 yields approximately 1.3% right now, Eagle Income stock provides nearly five times the income of the broader market index.
However, there are red flags to consider as well. Investors looking for stable income should be wary due to the company’s elevated payout ratio, which leaves little room for error. As an example, last year the company slashed its dividend by ~40% during the coronavirus pandemic.
This article will explore Eagle Point business model, potential for growth and the company’s dividend safety.
Founded in 2012, Eagle Point had its initial public offering on July 23, 2019. Eagle Point is a closed-end investment company. This means that shares of Eagle Point trade like any typical equity, with rising and falling share prices throughout the trading day, but the company will not issue additional shares.
The company will also not repurchase shares. Unlike exchange traded funds, Eagle Point will not see an influx of new capital, which allows the stock to trade more like an individual stock.
Source: Investor Presentation
Eagle Point lists its primary investment objective as generating high current income. This should appeal to income investors as the company’s main focus is producing dividends for shareholders. Capital appreciation is the secondary objective.
The company primarily invests in junior-debt tranches of collateralized loan obligations, or CLOs. Tranches are pooled collection of securities, often debt instruments, that are organized by risk or other characteristics and marketed to investors.
Unlike a traditional fixed income product, such as debt of a corporation or municipality, Eagle Point owns collateralized loan obligations. This means that the company owns the securities issued by a CLO. Eagle Point may also invest up to 20% of total assets in CLO equity securities and related securities.
Due to the junk credit rating on most CLO issues, which are those rated BBB and below by Standard & Poor’s, funds like Eagle Point are incredibly risky. The lower the credit rating, the higher likelihood of default. To help offset this risk, CLO funds often distribute the risk by owning a wide variety of differing CLOs.
The fund’s portfolio of just over $120 million is comprised of1,291 loan obligors, none of whom accounts for more than 1.38% of its total assets. The average loan maturity of the portfolio is 4.9 years, against 2.6 years of the average remaining CLO reinvestment period. The average rating on Eagle Point’s loans is B+/B. Eagle Point Income Fund was founded in 2018, generates around $11 million in net investment income annually.
While there are inherent risks when dealing with debt obligations that are below investment-grade, Eagle Point does have several positives in its favor.
Demand for leveraged loans and CLOs has been considerably higher over the past few years, but CLOs have grown at a much faster rate.
Source: Investor Presentation
Loans outstanding in the U.S. increased with a compound annual growth rate, or CAGR, of 6% since 2015. Over that same period of time, CLOs outstanding have grown from $427 billion in 2015 to $766 billion last year, which computes to a CAGR of 12%.
CLO demand is far outpacing loan demand. This is where a company like Eagle Point can find success. With higher demand for its CLOs, Eagle Income could see its business excel and afford to pay higher dividends to investors.
And while the rate of default can be higher in lower-rated debt, Eagle Point focuses on CLO debt that is just under investment-grade. The company invest primarily in the BB-rated debt tranche, which is one spot below an investment-grade credit rating.
From 1996 through Q2 2018, the cumulative default rate on BB-Rated CLO Debt was 1.5% (or 0.07% per year). This default rate shows that the rate of default for BB-rated debt is pretty low over the long-term. It is a riskier business model, but not as much as investors might think.
Eagle Point has paid a dividend every month since inception, but it has fluctuated from month to month and been reduced several times. The first cut was for the second distribution following the IPO which resulted in a 14% decline.
The company maintained the same dividend amount until reducing it by 40% for the payment made in April 2020, due to the coronavirus pandemic and the negative impact on the broader economy. Helping to offset this was a special dividend of $0.38 per share paid in 2020.
And, Eagle Point has slowly returned to dividend growth as the U.S. economy has emerged from the pandemic. The July 2021 monthly payment of $0.09 per share was an increase of 6% from the previous monthly payout. At an annualized rate of $1.08 per share, Eagle Point stock yields 6.6%.
Still, future payments should not be assumed, due to the inherently risk nature of its business model. With expected net investment income of $1.12 per share for 2021, Eagle Point currently has a dividend payout ratio above 90%. This implies a high level of risk to the dividend, should another economic downturn occur.
High yielding stocks often come with high risks and that is true for Eagle Point. The company specializes in CLOs, which is risky on its own, but even more so when the debt is rated below investment grade.
It is true that BB-rated debt, which Eagle Point prioritizes in its business, hasn’t experienced as many defaults over the last two decades, but this is still an area that only the most experienced and risk tolerant investor should consider investing.
Eagle Point also doesn’t have a very long track record, making it extremely difficult to answer how the company may perform in a recession.
The high yield above 6% is attractive for income investors, but there is no guarantee that the company won’t drastically reduce its dividend once again if its fundamentals deteriorate. Therefore, Sure Dividend believes that Eagle Point Income Company is best avoided by most income investors.