For sophisticated income investors willing to accept high risk in exchange for high yield, Bob Ciura, a contributor to MoneyShow.com and editor at Sure Dividend, highlights 5 stocks that offer double-digit yields and also pay those dividends on a monthly basis.
The stocks we review below pay shareholders a dividend every month. This separates them from the vast majority of stocks which pay dividends on a quarterly, annual, or semi-annual schedule. Importantly, investors should generally be wary of stocks with dividend yields above 10%, as the payout could be susceptible to dividend reductions during economic downturns, As such, investors should always do their own due diligence.
Ellington Financial (EFC)
High-yield monthly dividend stocks like Ellington Financial could be good candidates for further consideration. Ellington Financial has an 11.5% dividend yield, and the company currently generates enough earnings to cover the dividend.
Ellington Financial Inc. acquires and manages mortgage, consumer, corporate, and other related financial assets in the United States. The company acquires and manages residential mortgage-backed securities (RMBS) backed by prime jumbo, Alt-A, manufactured housing, and subprime residential mortgage loans.
Additionally, it manages RMBS, for which the U.S. government guarantees the principal and interest payments. It also provides collateralized loan obligations, mortgage-related and non-mortgage-related derivatives, equity investments in mortgage originators and other strategic investments.
In the 2021 fourth quarter, Ellington’s interest income came in at $41.6 million, 14.6% higher from the previous quarter. Most of the growth came from the loan origination businesses. Ellington’s total long credit portfolio expanded by 22% to $2.1 billion. Ellington’s book value per share increased from $18.35 to $18.39 during the quarter.
The monthly dividend remains at $0.15 per share, for an annualized payout of $1.80 per share. We forecast FY2022 EPS at $1.83, stable from 2021. Therefore, the company pays out virtually all of its earnings to shareholders. This is feasible, assuming that the earnings do not fall from current levels. With a payout ratio near 100%, there is little room for error. However, the dividend can continue to be supported at the current level of earnings.
Fortunately, the company has designed its investment portfolio to not be overly vulnerable to fluctuations in interest rates. For example, 75% of its RMBS exposure is allocated to 30-year fixed mortgages. Additionally, while around 65% of its credit portfolio is invested in residential mortgages, that 65% is split among many different securities types (non-QM, Reverse mortgages, Real-estate-owned loans etc.).
At Ellington’s current portfolio construction, a 50 basis-point decline in interest rates would result in $2.0 million in gains (i.e., – 0.16% of equity), while a similar increase in rates would result in losses of $9.5 million (0.72% of equity). Ellington has designed its portfolio in such a way that these inevitable movements in rates over time won’t have a major impact on its overall portfolio.
Since its IPO, Ellington Financial has paid cumulative dividends in excess of $28 per share, which is almost double its current share price. Therefore, it has been a strong income holding for its investors. While investors will need to closely monitor the company’s portfolio to make sure rising rates do not bring down earnings, the dividend appears safe in the current environment and is very attractive at 12.0%.
AGNC Investment Corp. (AGNC)
AGNC Investment Corp., with an 11.9% dividend yield, is a Real Estate Investment Trust. But while most REITs own physical properties, AGNC is different in that it does not own any physical properties. Instead, AGNC is a mortgage REIT that invests primarily in agency mortgage-backed securities (or MBS) on a leveraged basis.
AGNC’s asset portfolio is comprised of residential mortgage pass-through securities, collateralized mortgage obligations (or CMO), and non-agency MBS. Many of these are guaranteed by government-sponsored enterprises. The majority of American Capital’s investments are fixed-rate agency MBS. Most of these are MBS with a 30-year maturity period.
The counterparties to most of American Capital’s assets are located in North America. Counterparties in Europe also represent a significant percentage of the trust’s total portfolio. American Capital derives nearly all its revenue in the form of interest income. It currently generates $1.5 billion in annual net revenue.
The current environment is challenging for AGNC, given the fluctuations in interest rates over the past several months. In the 2022 first quarter, AGNC’s net spread and dollar roll income per share stood at $0.72 per share. This was down 4% year-over-year. Tangible net book value was $13.12 per share. Economic return on tangible common equity was -14.4%, compared with -1.8% in the previous quarter.
The company’s investment portfolio as of March 31, 2022, stood at $68.6 billion. Meanwhile, cash and unencumbered agency MBS amounted approximately $3.5 billion at quarter end.
AGNC has a current dividend yield of 12%. However, the dividend may not be safe in all environments. The mortgage-backed security industry — given its leverage and interest rate sensitivity — is prone to underperform when the housing market experiences a downturn and mortgage foreclosures rise.
That said, AGNC had its initial public offering in 2008, and the company has a solid track record. AGNC has generated industry-leading total economic return based on net asset value.
AGNC’s industry-leading performance since its inception has been driven by its highly efficient operating cost structure. It also possesses a competitive advantage through economies of scale as it is one of only a few residential mortgage REITs with a market capitalization of above $5 billion.
The current dividend payout is $0.12 per share monthly, which equates to an annualized payout of $1.44 per share. The company is expected to generate earnings-per-share of $2.39 for 2022. This means AGNC has a projected dividend payout of 60% for 2022, which indicates that the dividend payout is secure. Of course, conditions can change rapidly in the MBS industry.
Investors will need to keep a close eye on the direction of interest rates, and AGNC’s quarterly results. But for now, AGNC appears to be an attractive choice for investors looking for high income and frequent payouts.
ARMOUR Residential REIT has a 15.8% dividend yield, and it makes dividend payments each month. With a dividend yield this high, investors should assess whether the dividend is sustainable.
ARMOUR Residential is a mortgage REIT that was formed in 2008. The trust invests primarily in residential mortgage-backed securities that are guaranteed or issued by a United States government entity including Fannie Mae, Freddie Mac and Ginnie Mae. ARMOUR has a $750 million market capitalization and produces about $160 million in net revenues.
ARMOUR reported Q1 results on April 27th, 2022. The trust’s net interest income stood at $30.9 million. Liquidity including cash and unencumbered securities amounted to $628.3 million with $8.48 in book value per common share at quarter end. Q1 distributable earnings per share stood at 28 cents while the debt-to-equity ratio stood at 6.3-to-1 and leverage, including TBA Securities stood at 7.0-1.
Meanwhile, net interest margin increased to 1.78%, up 3 basis points quarter-over-quarter. Portfolio composition was 85% agency mortgage-backed securities, including TBA securities. Comprehensive loss stood at $(148) million, representing (60%) annualized return based on stockholder’s equity at the beginning of the quarter. Finally, interest rate swap contracts amounted to $7.4 billion which represents 103% of total repurchase agreement and TBA Securities liabilities.
ARMOUR’s cash flow has been volatile since its inception in 2008, but this has generally been true across the mortgage REIT industry. The coronavirus pandemic was another challenge the company encountered over the past two years. These factors led to a pronounced drop in cash flow, which then resulted in a dividend cut.
Fortunately, the company is on better footing, with a recovery in the past few quarters. Going forward, the continued recovery from the pandemic conditions could bring a return to growth. This will be important to the company being able to sustain its dividend payout.
ARMOUR’s quality metrics have been volatile given the performance of the trust as rates have moved around over the years. Gross margins have moved down since short-term rates began to rise meaningfully a couple of years ago, while balance sheet leverage had been moving down slightly, though it saw an uptick again this past quarter. Interest coverage has declined with spreads but also appears to have stabilized, although there is always potential for volatility.
ARMOUR currently pays an annualized dividend of $1.20 per share, while the company is expected to produce $1 of earnings-per-share in 2022. This means the dividend payout ratio is 120%, a sign that the current dividend payout is not sustainable. Indeed, the company has cut the dividend previously on multiple occasions.
That said, even a steep cut from current levels would still provide a compelling yield, as the stock currently yields over 16%. ARMOUR has a shaky track record since its inception, but the company does have some positives including prudent leverage and a management team that does not chase unprofitable growth.
Ellington Residential Mortgage REIT (EARN)
Ellington Residential Mortgage REIT has a 12.5% dividend yield. As its name suggests, the 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.
In this way, Ellington Residential differs from most other REITs. The typical REIT owns physical properties and leases those properties to tenants. Ellington Residential does not invest in physical properties.
Ellington Residential is a micro-cap, with a market capitalization just under $100 million. Investors should consider the unique risks and characteristics of micro-cap stocks, which are typically thinly traded and can be prone to greater volatility.
The mortgage REIT has an agency residential mortgage-backed securities (RMBS) portfolio of $1.1 billion and a non-agency RMBS portfolio of $8.7 million. Agency MBS are created and backed by government agencies or enterprises, while non-agency MBS are not guaranteed by the government.
Ellington Residential has a few avenues of growth, which all revolve around optimizing their MBS portfolio. Capitalizing on opportunities driven by market volatility, particularly around the rate hiking cycle and quantitative tightening, could also yield results.
Additionally, Ellington will protect their book value and manage volatility through interest rate hedges and liquidity management, which they have ramped up at the start of 2022. Generating growth will be important for the company’s ability to maintain its high dividend payout.
Ellington Residential stock currently yields 12.5%. Stocks with double-digit yields often have fluctuating dividend payouts, and Ellington Residential is no different. The company recently reduced its dividend by 20% to the current level. Of course, the stock still yields 12.5% so it remains an extremely high yielder, even with the reduction.
The current dividend appears to be covered with underlying earnings. On May 2nd, 2022, Ellington Residential reported its first-quarter results. Core earnings of $3.9 million this quarter led to core EPS of $0.30 per share, which covered the dividend paid in the period.
EARN achieved a net interest margin of 1.76% in Q1. At quarter end, Ellington had $29.9 of cash, cash equivalents, and other liquidity, and $11.3 million of other unencumbered assets. The debt-to-equity ratio was 9.1x. Book value per share declined from the prior quarter to $10.14, a 14% decrease.
With a current annualized dividend of $0.96 per share against expected core EPS of $1.22 for 2022, EARN has a projected dividend payout ratio of 79%. This implies the dividend is covered, assuming core EPS remains steady or grows. We rate the stock as a speculative buy due to its attractive total return potential alongside an unreliable dividend.
Orchid Island Capital (ORC)
Orchid Island Capital has a 19.0% dividend yield, and it makes dividend payments each month. With a dividend yield this high, investors should continually assess whether the dividend is sustainable.
Orchid Island Capital, Inc. is a REIT, operating in the mortgage industry. Mortgage REITs are purely financial entities, and Orchid Island does not own any physical properties. Instead, it is an externally managed REIT (by Bimini Advisors LLC) that invests in residential mortgage-backed securities (RMBS), either pass-through or structured agency RMBSs, which are financial instruments that collect cash flow based on residential loans such as mortgages, including subprime, and home-equity loans.
On April 28th, 2022 Orchid Island Capital reported Q1 results. The company reported a Q1 net loss of $148.7 million. Net interest income increased to $39.2 million from $24.9 million year-over-year. Total expenses stood at $4.7 million. Moreover, net realized and unrealized losses stood at $183.2 million on RMBS and derivative instruments, including net interest expense on interest rate swaps.
Meanwhile, Q1 total return stood at (19.5%) while book value per common share stood at $3.34. The company also reported net portfolio loss of $144.03 million compared to $25.88 million net portfolio loss in the year-ago period. Finally, Orchid Island Capital had $0.155 per common share of total dividends declared and paid in Q1.
The growth outlook for mortgage REITs is challenged. Mortgage REITs make money by borrowing at short-term rates and lending at longer-term rates, then pocketing the difference. This is referred to as the spread, which is how Orchid Capital generates its cash flow.
When the spread between short-term rates and long-term rates compresses, profitability erodes at a rapid pace. This is why mortgage REITs can be dangerous if the yield curve flattens.
In addition, while the dividend yield is sky high, the payout record has been inconsistent. After bumping the dividend to $0.18 per month in late 2013, Orchid Island paid this dividend rate for 19 months before undergoing a series of dividend reductions. Still, shares currently yield 19%, an extremely high payout level. With a projected dividend payout ratio of 81% for 2022, the current payout level appears sustainable, albeit with a high level of risk.
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