Published on March 7th, 2023 by Samuel Smith
Real estate investment trusts sometimes have high dividends yields in excess of 10%. Ellington Residential Real Mortgage REIT is one such example. The REIT has a massive dividend yield of 12.7% today.
Real estate stocks are a popular choice for creating passive retirement income, but high-yielding stocks can sometimes be a warning sign that significant challenges are impeding the business. For Ellington Residential, as the share price drops due to its circumstances, the dividend yield increases.
Ellington Residential Mortgage (EARN) may not be a well-known REIT. In October 2021, the corporation chose to modify its dividend payment schedule from quarterly to monthly.
That means EARN joins the list of monthly dividend stocks. We’ve compiled a list of 84 monthly dividend stocks, along with important financial metrics like dividend yields and payout ratios, which you can view by clicking on the link below:
This article will analyze the investment prospects of Ellington Residential Mortgage REIT in detail.
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.
Ellington Residential is headquartered in Old Greenwich, Connecticut. It is a small-cap company with a market capitalization of only $100 million. Ellington Residential Mortgage Management LLC externally manages Ellington Residential Mortgage REIT.
The mortgage REIT has an agency residential mortgage-backed securities (RMBS) portfolio of $873 million and a non-agency RMBS portfolio of $20.7 million. Agency MBS are created and backed by government agencies or enterprises, while the government does not guarantee non-agency MBS.
Source: Investor Presentation
On March 6th, 2023, Ellington Residential reported its Q4 results for the period ending December 31st, 2022. In the fourth quarter, the Q4 adjusted distributable EPS was $0.25, surpassing the analyst estimate of $0.22, and was up from $0.23 in Q3. Laurence Penn, the CEO and President, stated that the increase was due to a more favorable outlook on inflation and Fed monetary policy, resulting in a significant rebound for Agency RMBS after three-quarters of underperformance. Yield spreads tightened, particularly in November, due to lower volatility and higher investor demand, resulting in a more positive year-end.
At the end of December 31, 2022, the book value was $8.40 per share, which includes the impact of dividends of $0.24 per share in the quarter, compared to $7.78 at the end of September 30. Q4 net interest margin was 1.37%, an increase from 1.28% in Q3. The weighted average constant prepayment rate for the fixed-rate Agency specified pool portfolio was 6.1%, compared to 9.8% in the previous quarter.
As of December 31, 2022, cash and cash equivalents increased to $34.8M from $25.4M on September 30, and other unencumbered assets increased to $2.9M from $2.6M on September 30.
Ellington has seen its core earnings per share shrink rather than grow for most of its history.
In its first few years, the company held its share count consistent, but following 2016, the number of shares outstanding has grown, which can be another barrier to growing earnings on a per share basis.
The corporation has a few avenues of growth, which all revolve around optimizing its MBS portfolio. Capitalizing on opportunities driven by market volatility, particularly around Fed tapering, could yield results. The increasing interest rates will also benefit the company in the long term.
Source: Investor Presentation
Additionally, Ellington will protect their book value through interest rate hedges and liquidity management. Despite this, the company has a poor track record of earnings, leading us to anticipate very little growth of 1.0%. This anemic growth will unlikely lead to further dividend increases in the medium term.
Competitive Advantage & Recession Performance
Ellington claims that their portfolio managers are among the most experienced in the MBS sector and their analytics have been developed over the company’s 28-year history. Elligton Management Group is large, with $9 billion in assets under management. The group has been around since 1994 and has over 170 employees and 70 investment professionals.
The company possesses advanced proprietary models for prepayments and credit analysis. Also, roughly 25% of the company’s employees focus on research and information technology.
While the company’s details were not public in the 2008 real estate crash, a recession of that magnitude would almost definitely affect EARN. Its focus on government-sponsored MBS provides some safety, but a prolonged recession in the future would likely affect EARN’s bottom line and result in further dividend reductions.
The dividend has been cut every single year (results from 2013 only account for half the year) in its history other than an increase in 2021. Followed by the dividend schedule being modified to monthly over quarterly, which certain shareholders may prefer.
Ellington’s latest dividend payout level is $0.08 per month. This equals an annual dividend of $0.96.
On an annualized basis, the $0.96 per share dividend is well below all previous payout levels.
Still, at a level of $0.96 per share, EARN stock yields 12.7%. Therefore, EARN stock is still attractive for income investors as a high dividend stock.
EARN’s dividend is far from trustworthy, given the corporation has had a trail of cuts in the past. In at least three years of the last eight full calendar years in operation, the company’s payout ratio was near or above 100%. Currently, the dividend appears to be stretched, and it may not be covered for the year.
Ellington Residential Mortgage REIT has a massive dividend yield of 12.7%, and the company only recently started paying out monthly dividends.
However, Ellington Residential has a long history of cutting its dividend. That, and the fact that the company is anticipating paying out nearly 100% of core earnings for 2023, puts the dividend at risk for another cut.
Ellington Residential may be a fitting choice for high-yield investors with an appetite for risk, but its dividend history is far less than stellar. And the dividend today is on shaky grounds.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
- 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