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With a 12.1% current dividend yield and monthly dividend payout, Ellington Financial (NYSE:EFC) often catches the attention of investors seeking attractive returns. Ellington Financial is a publicly traded mortgage real estate investment trust (REIT). Mortgage REITs generally invest in mortgages or securities tied to residential and commercial properties. As a specialty finance company, Ellington Financial focuses on acquiring and managing a diverse portfolio of mortgage-related assets, including residential and commercial mortgage-backed securities, mortgage loans, and consumer loans.
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While Ellington Financial’s current yield is appealing, mortgage REITs tend to have a high level of risk, which may not make them suitable for all investors. Moreover, Ellington's dividend payout has varied greatly over the years, and the stock price has faltered somewhat, down over 25% for the past five years, because it has never fully rebounded from a sharp dip during the pandemic. Investors may want to consider all of the options available before going all in with Ellington Financial.
Ellington Financial Inc.: An Overview
Ellington Financial Inc. distinguishes itself by strategically managing a diversified portfolio of mortgage assets. The company’s portfolio includes agency and non-agency residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), mortgage loans, and other real estate-related investments. EFC employs leverage to enhance returns, similar to other mortgage REITs, but with a diversified approach that aims to mitigate risk. The company also operates Longbridge, a reverse mortgage platform.
In the second quarter, Ellington Financial reported net income of $52.3 million, or $0.62 per share. Ellington has been changing its strategy to fit the market. During the quarter, the company added to some of its credit strategies, including home equity lines of credit (HELOCs) and closed-end second lien loans, proprietary reverse mortgage loans, commercial mortgage bridge loans, re-performing and nonperforming residential mortgage loans, commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLOs). At the same time, it cut back on lower-yielding sectors, including agency and non-agency residential mortgage-backed securities.
Speaking to analysts, CEO Larry Penn highlighted the value of this diversification: "Our investment pipeline across our diversified proprietary loan origination channels is strong, and the loan originators in which we have invested are not only providing healthy flow into that pipeline but also generating operating income themselves because we have equity investments in those same originators."
A changing interest rate environment may change the picture somewhat for Ellington Financial. One concern is that cash-out refinances will become preferable to HELOCs. However, Larry Penn said, “You're going to need quite a big drop, I think, before HELOCs and closed-end seconds are going to no longer make as much sense for people.”
On the earnings call, Lee Cooperman of Omega Family Office asked about the future of the monthly dividend, which is currently at $0.13. Investors hoping for a raise will be disappointed. Penn clarified that he is happy with the current dividend and has no plans to raise it.
The Ascent Income Fund: An Alternative Outside Of The Stock Market
For investors seeking high yields, publicly traded mortgage REITs aren't the only option. One alternative is the Ascent Income Fund from EquityMultiple. It centers on private credit investments, targeting stable income from senior commercial real estate debt positions. A focus on first-lien debt and diversification across borrowers, geography, and property types is intended to mitigate risk and provide greater stability in returns.
One key advantage of investing in a private REIT like the Ascent Income Fund is that its share price is directly tied to the fund's net asset value (NAV), which protects investors from some of the wild swings of volatility that occur in the stock market. The Ascent Income Fund has a historical yield of 12.1%. Investors can opt for quarterly payments or reinvest their dividends and compound their returns. Right now, reduced competition from regional banks has created a favorable environment for those interested in investing in real estate debt. The Ascent Income Fund's minimum investment for first-time investors is $5,000.
Mortgage REITs will always be a popular investment choice for those seeking income. However, long-term investors know they can be heavily exposed to cyclical risk. In the case of Ellington Financial, the increasing diversification of its loan portfolio may provide some protection. In the past, its dividend yield has fluctuated dramatically. Investors should know other ways to invest in debt and receive high returns outside the traditional stock market.
This article Thinking Of Buying Ellington Financial Corp For Its 12.1% Dividend? It's Not The Only Option originally appeared on Benzinga.com