Posted on July 16, 2021 by Bob Ciura

Monthly dividend stocks are preferred because of their more frequent dividend payments compared to traditional quarterly dividend payers. Eagle Point Income Company (EIC) is a relatively new company that offers shareholders a monthly dividend payment.

We cover fewer than 60 stocks that offer a monthly dividend. You can download our full list of stocks with monthly dividend payments (along with key metrics such as price / earnings ratio, dividend yield and payout ratio) by clicking the link below:

Eagle Point is also a dividend stock that yields greater than 6% based on the current share price. When you consider that the S&P 500 is currently seeing a return of roughly 1.3%, Eagle Income stock offers nearly five times the income of the broader market index.

However, there are also red flags to watch out for. Investors looking for stable income should be cautious because of the company’s increased payout ratio, which leaves little room for error. As an example, the company cut its dividend by ~ 40% last year during the coronavirus pandemic.

This article examines Eagle Point’s business model, growth potential, and dividend security for the company.

Business overview

Eagle Point was founded in 2012 and went public on July 23, 2019. Eagle Point is a closed-ended investment company. This means that, like any typical stock, Eagle Point’s shares will trade with its share prices rising and falling throughout the trading day, but the company will not issue any additional shares.

The company will also not buy back any shares. Unlike publicly traded funds, Eagle Point will not see an inflow of new capital, which allows the stock to trade more like a single stock.

Source: Investor Presentation

Eagle Point states that its primary investment objective is to generate high current income. This should appeal to income investors as the company’s primary focus is on generating dividends for shareholders. Capital growth is the secondary goal.

The company invests primarily in junior debt tranches of collateralized loan obligations (CLOs). Tranches are pooled collections of securities, often debt, that are classified according to risk or other characteristics and marketed to investors.

Unlike a traditional fixed income product such as B. Corporate or community debt, Eagle Point has secured loan obligations. This means that the company owns the securities issued by a CLO. Eagle Point may also invest up to 20% of total assets in CLO stocks and related securities.

Because of the junk credit rating of most CLO issues, which are rated BBB and below by Standard & Poor’s, funds like Eagle Point are incredibly risky. The lower the credit rating, the higher the probability of default. To offset this risk, CLO funds often spread the risk by owning a variety of different CLOs.

The fund’s portfolio of just over 120th million consists1,291 Borrowers, none of whom are more than 1.38% of his total assets. The average credit The term of the portfolio is 4.9 Years, against 2.6 Years of aveAnger remaining CLO reinvestment period. The aveAnger Eagle Point loan rating is B + / B. Eagle Point Income Fund was Founded in 2018, generates approximately $ 11 million in net investment income annually.

Growth prospects

While there is inherent risk in dealing with sub-investment-grade debt, Eagle Point has some positives in its favor.

The demand for leveraged loans and CLOs has been significantly higher in recent years, but CLOs have grown much faster.

Source: Investor Presentation

US loans outstanding has increased at an average annual growth rate (CAGR) of 6% since 2015. Over the same period, outstanding CLOs rose from $ 427 billion in 2015 to $ 766 billion last year, a CAGR of 12%.

The CLO demand far exceeds the credit demand. This is where a company like Eagle Point can be successful. Given the higher demand for its CLOs, Eagle Income could outperform its business and afford higher dividends to investors.

And while the default rate can be higher on lower-rated bonds, Eagle Point focuses on CLO bonds that are just below investment grade. The company invests primarily in the BB rated debt tranche, which is one place below investment grade.

From 1996 to Q2 2018 the cumulative failure rate was BB-Rated CLO The debt was 1.5% (or 0.07% per year). This default rate shows that the default rate for BB rated debt is quite low in the long run. It’s a riskier business model, but not as much as investors might think.

Dividend analysis

Eagle Point has paid a dividend every month since inception, but it has fluctuated from month to month and has been reduced several times. The first cut was on the second post-IPO payout, which resulted in a 14% decline.

The company kept the same dividend amount until it was cut by 40% for the payment made in April 2020 due to the coronavirus pandemic and its negative impact on the overall economy. To make up for this, a special dividend of $ 0.38 per share was paid in 2020.

And Eagle Point has slowly returned to dividend growth as the U.S. economy emerged from the pandemic. The July 2021 monthly payment of $ 0.09 per share was a 6% increase over the previous monthly payment. At an annualized rate of $ 1.08 per share, Eagle Point stock is yielding 6.6%.

However, due to the inherent risk nature of the business model, future payments should not be accepted. With expected net investment income of $ 1.12 per share for 2021, Eagle Point currently has a dividend payout ratio of over 90%. This implies a high risk to the dividend should another economic downturn occur.

Final thoughts

High yield stocks often come with high risk, and so does Eagle Point. The company specializes in CLOs, which is risky on its own, but even more so when the debt is rated below investment grade.

It’s true that BB-rated debt, which Eagle Point prioritizes in its business, hasn’t seen as many defaults in the past two decades, but this is still an area only the most experienced and risk-tolerant investors should invest in.

Eagle Point doesn’t have a very long track record either, which makes it extremely difficult to answer how the company could fare in a recession.

The high yield of over 6% is attractive to income investors, but there is no guarantee the company won’t cut its dividend drastically again if its fundamentals deteriorate. Hence, Sure Dividend believes that Eagle Point Income Company is best shunned by most income investors.

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