Ellington Financial Inc: A Monthly Dividend Stock That Yields 9.5%
A High-Yield Real Estate Stock to Think About
It doesn’t take a rocket scientist to see why Ellington Financial Inc (NYSE:EFC) could be special.
In today’s market, most dividend stocks follow quarterly distribution schedules. Ellington Financial, however, pays investors monthly. Also in today’s market, most dividend stocks yield less than four percent. Ellington Financial, on the other hand, yields 9.5% at its current share price.
The only issue, of course, is that when something seems too good to be true, it often is. So it’s better to approach this high-yield, monthly dividend stock with caution.
Headquartered in Old Greenwich, CT, Ellington Financial Inc is a real estate investment trust (REIT). The company invests in a diverse array of financial assets, such as residential and commercial mortgage loans, mortgage-backed securities, consumer loans, asset-backed securities that are backed by consumer loans, and collateralized loan obligations.
You may know that the commercial real estate sector was hit particularly hard by the COVID-19 pandemic last year. And dividend cuts weren’t uncommon among mortgage REITs.
In the case of Ellington Financial, the company was paying monthly dividends of $0.15 per share before the pandemic. Then, on April 7, 2020, the company’s board decided to reduce the monthly payout to $0.08 per share, in light of the expected impact from COVID-19. (Source: “Dividends Common Stock,” Ellington Financial Inc, last accessed June 10, 2021.)
No one likes dividend cuts, but the neat part was that, as the economic environment started to improve, Ellington Financial stock’s payout began to rise.
On June 5, 2020, the REIT’s board declared a one-cent increase in the monthly dividend rate to $0.09 per share. In November 2020, the company announced another one-cent increase, bringing EFC stock’s monthly dividend to $0.10 per share.
But that’s not all. In April 2021, Ellington Financial decided to reward shareholders with a more substantial, 40% increase to its monthly dividend rate to $0.14 per share. In May 2021, that was followed by another one-cent increase to $0.15 per share.
In other words, at this point, the company’s monthly dividend payment is back to its pre-pandemic level.
As it turns out, Ellington Financial stock’s price had a similar journey as its dividend payout. It tumbled at the onset of the pandemic but gradually came back up. At the time of this writing, EFC stock is trading just above where it was before the COVID-19-induced sell-off last year.
Ellington Financial Inc (NYSE:EFC) Stock Chart
Chart courtesy of StockCharts.com
Also, if you’re wondering whether the company can afford to bring its payout back up this quickly, the answer is yes (so far).
In 2020, Ellington Financial generated core earnings of $1.63 per share. Its dividend payments, on the other hand, totaled $1.26 per share for the year. So the company managed to outearn its payout. (Source: “Ellington Financial Inc. Reports Fourth Quarter 2020 Results,” Ellington Financial Inc, February 18, 2021.)
In the first quarter of 2021, Ellington Financial’s core earnings came in at $0.43 per share. During that quarter, the company declared three monthly dividends totaling $0.30 per share. So again, the payout was covered. (Source: “Ellington Financial Inc. Reports First Quarter 2021 Results,” Ellington Financial Inc, May 5, 2021.)
Of course, because Ellington Financial stock’s dividend has gone further up since the end of the first quarter, the amount needed to cover its payout going forward will be higher than before.
When asked about future coverage of Ellington Financial Inc’s dividend, the company’s chief executive officer, Larry Penn, said, “I think we absolutely see the new dividend as being covered by core going forward. Otherwise, I don’t think we would have raised it to that level.” (Source: “Ellington Financial’s (EFC) CEO Larry Penn on Q1 2021 Results – Earnings Call Transcript,” Seeking Alpha, May 8, 2021.)
All things considered, EFC stock has completed a rather impressive comeback story. While no dividend is 100% safe, this 9.5%-yielding monthly dividend stock certainly deserves a spot on an income investor’s watch list.