Eagle Point Credit: This 13.2% Yield Looks Interesting

Eagle Point

Eagle Point Credit Yields 13.2%

You should avoid most high-yield stocks.

More often than not, these oversized payouts are on borrowed time. For that reason, I take a pass on most high-yield names that cross my desk.

But once in awhile, you find an exception. You uncover an overlooked business which cranks out consistent income for owners. And today’s stock, which sports an impressive 13.2% yield, should inspire confidence, at least as far we care about distribution safety.

Eagle Point Credit Company Inc (NYSE:ECC) invests in a type of debt called collateralized loan obligations (CLOs). You could think of these as a collection of loans packaged together into one security, like a type of bond mutual fund. These CLOs pay out interest to Eagle Point, which then get passed on to shareholders.

The distribution looks reasonably safe. CLOs soldiered through the last financial crisis quite well. Aside from steep paper losses, the highest-rated securities suffered little in the way of defaults.

Some managers in this space juice returns by buying up the junkiest securities on margin, which can obviously backfire in a downturn. In the case of Eagle Point, executives have avoided some of these pitfalls by sticking to high-quality CLO’s and maintaining a light debt load. Executives have funded most of their business by issuing preferred stocks, which offer more wiggle room than traditional bonds.

This business has become quite lucrative. Through the first nine months of 2017, the company earned $25.1 million in interest income. Management also recorded an extra $2.3 million from realized gains on investments. (Source: “Consolidated Financial Statesments (Unaudited),” Eagle Point Credit Company Inc, last accessed February 9, 2018.)

Executives have opted to pay out all of these profits to owners. The company mails out a monthly dividend $0.20 per share each month, which comes out to an ordinary yield of 13.2%. Any extra profits get paid out at the end of the fiscal year, usually in the form of a special distribution each August.

Source: StockCharts.com

Of course, this distribution comes with some risk. Because management pays out all of their profits, they don’t have a lot of wiggle room to survive a bad year or two. This income stream will be more volatile than traditional dividend stocks.

But with a lucrative business paying 13.2%, this dividend stock is worth a second look.

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