To The Moon

Five days into October and the US market is still not looking good.

US pre-market indicators for 05 Oct 2023 (see above), is already marginally lower than yesterday’s closing. Looks like it is another bloodbath day.

What Has Gone Wrong Exactly? I dunno either.

(1) Official reports released so far:

• Core PCE (Aug): 3.9%, lower than July 4.3%

• Core CPI (Aug): 4.3%, lower than July 4.7%.

• US Q2 2023 GDP (2nd estimates): 2.1%.

• Uni of Michigan Consumer Sentiments (UMCSI) for Sep 2023 has dipped to 68.1, lower than July’s 69.5.

• US weekly jobless claims for week ending 23 Sep 2023 fell to 204,000, -5.12% lower than 16 Sep 2023 claims.

All reports point to a gradual cooling in US’s inflation, while US economy remains healthy in a relatively tight labour market.

(2) Catalysts dampening investment sentiments:

• US government swelling debt - US$33 Trillion, 156 Billion. And a disarray in the House of Representative as House speaker Mr Kevin McCarty has been ousted.

• Federal Reserves - one more interest hike for 2023.

• UAW labour strike - further escalation with repercussions (see below).

In light of all the negative forces at work in the US market, is it time to tweek one’s strategy?

Let me share the TipRanks post that arrived in my mailbox.

• Dividend investing has always been popular, and for good reason.

• Dividend stocks offer a wide range of advantages for return-minded investors.

• Two significant advantages are [a] a reliable income stream and [b] an inflation-beating yield.

• Together, these advantages can form the base of a truly sound portfolio.

• Do not take my words or TipRanks’ post, for it. Mr Warren Buffet is a living proof (see below):

• Most dividend stocks pay out on a quarterly basis.

• “Strangely”, there are some stocks with monthly pay out.

• Having dividend stocks with monthly payment allows investors to better plan the income streams to meet their needs.

• Stock’s yields are still calculated based on the annualized rate of the dividend. This means even a small monthly payment, multiplied by 12, can result in a high annual yield.

• Like stocks’ prices, not all dividend stocks are created equal, and some offer better opportunities than others.

This is where Wall Street’s analysts’ recommendations come in.

TipRanks have listed 2 monthly dividend paying stocks that:

• Not only boast a fantastic dividend yield of at least 13%.

• Also qualify as ‘Strong Buys (?)’ according to the analysts’ consensus.

1) $Dynex Capital(DX)$

• A real estate investment trust company (REIT) stock.

• Focuses on [a] mortgage loans and [b] securities.

• Allocates its resources to both [1] agency and [2] non-agency mortgage-backed security (MBS) instruments.

• It also has exposure to the commercial MBS market.

• Company’s portfolio also contains a sizable portion of mortgage loans, including both [i] securitized single-family residential and [ii] commercial mortgages dating back to the ’90s.

• It adheres to several simple strategic points in building its portfolio.

• Dynex is committed to [a] capital preservation and [b] disciplined allocation of that capital, using risk management techniques to maintain long-term returns.

• Furthermore, it has always been committed to maintaining the dividend as a healthy component of those returns.

• Finally, and of key importance to dividend investors, Dynex keeps its sights set on maintaining stable and acceptable returns over the long term.

• In its Q2 2023 quarter earnings report, Dynex’s bottom line came in with a net income per diluted share of $0.96 cents.

• This EPS exceeded expectations by $1.25 and compared favorably to the 81-cent EPS loss reported for Q1 2023.

• Additionally, Dynex reported $561.5 Million in ‘cash and unencumbered assets’ available at the end of Q2, with $300.1 Million in cash, representing a +7.5% increase from Q1.

• The combinations of [1] positive net income and [2] solid cash assets on hand fully covered the monthly dividend payment, which was last declared in August at 13 cents per common share and paid on 01 Sep 2023.

• The dividend annualizes to $1.56 per share, providing an attractive yield of 13%.

BTIG, analyst Eric Hagen has the following comments:

• Points out the company’s solid return profile and that dividends are fully covered by income & assets.

• Expects DX’s dividend to remain stable at these spread levels, or even a little wider, followed by the opportunity to capture some capital appreciation (book value upside) when mortgages eventually tighten versus interest rates.

• Have strong conviction for spreads to tighten is admittedly a moving target (tethered mostly to realizing lower interest rate volatility), although we expect stock valuation could improve quickly when that visibility comes into better focus…

• Think the real value being captured along the way is managing and preserving a very healthy and transparent liquidity position, which we expect to remain in excess of $400 million, or more than half its capital base”.

• Support a “Buy” rating for DX stock.

• With a $15 price target points toward an upside potential of ~26% in the coming months.

• In addition to dividend, anticipate the total return on this stock is a solid +39% for the year ahead.

• Overall, 3 recent analysts’ reviews about Dynex are positive, making the Strong Buy consensus rating unanimous.

• The shares are selling for $11.40 (as of 03 Oct 2023).

• With analysts’ $14.33 average price target implies a +25.70% one-year upside.

2) $Ellington Financial LLC(EFC)$.

• This is another mortgage REIT.

• It works in the [a] acquisition and [b] management of financial assets, with particular attention to such mortgage-related assets as MBSs and equity investments in commercial and residential mortgage loans.

• Ellington Financial reported having $9.4 Billion in total assets under management as of 30 Jun 2023.

• Asset under management (AUM) is only part of Ellington’s story.

• Company reported a solid balance sheet in its Q2 2023 quarterly earnings report.

• Total assets came to $14.3 Billion, Cash came to $194.6 million and Other unemcumbered assets came to another $343.3 Million.

• The company had a book value of $14.70 per common share, at the end of the quarter.

• Note: The book value is down approximately -$0.35 cents per common share from December 2022 and March 2023 readings.

• Ellington has adjusted distributable earnings of $0.38 cents per common share for Q2 2023.

• This was -$0.05 cents per share lower than had been expected.

• It has maintained its monthly dividend payment at $0.15 cents per common share, or 45 cents per share quarterly, despite the miss on earnings.

• Annualized dividend payment of $1.80 per common share, yields 14.4% at current share prices.

On behalf of Piper Sandler, analyst Crispin Love has the following comments:

• Points out that the firm is taking steps to [a] diversify its portfolio and [b] expand into new territory.

• One possibility could be loan acquisition opportunities to buy both performing and non-performing loans.

• He believes Ellington could be a bidder for the Signature CRE loans as the company has the expertise.

• The purchases would be consistent with the company’s history (especially following the Great Financial Crisis).

• In recent earnings calls, management commented that it would be interested in participating in the FDIC loan sales assuming that the transactions would be accretive to Ellington.

• In addition to potentially participating in FDIC loan sales, Ellington has been vocal about a desire to buy CRE loans from banks.”

• He has an “Overweight” rating for Ellington.

• His target price is $15 per share implies a +20% upside potential on the one-year time horizon.

• Throw in the dividend yield, and the stock’s total yield on the one-year time frame climbs as high as +33%.

• On the recent 5 analysts’ reviews for Ellington — it was a “4 to 1” breakdown favoring “Buy” over “Hold”.

• Giving the REIT stock a Strong Buy consensus rating.

• The REIT is priced at $11.40 (as of 03 Oct 2023).

• With a set average price target of $14.50, this suggests a +27.19% one-year upside.

My Viewpoints:

• One should always keep an opened mind when it comes to investing.

• Most often, there will always be something “new” to learn.

• Also it is important to “see” what are other products out there in the US market.

• On the 2 REITS recommendations:

• Its market capitalization is $617.929 Million, smaller cap compared to Ellington Financials.

• Its beta stands at 1.21 less volatile compared to Ellington Financials.

• Its average trading volume is 971,393, substantially higher trading volume compared to EFC.

• In terms of Earnings per share (EPS), i has missed its past 4 quarters EPS, weaker performance in past 4 quarters compared to EFC.

• Its market capitalization is $836.311 Million is approx $200 Million higher than DX.

• Its beta stands at 1.85, it is more volatile compared to DX.

• Its average trading volume is 714,795. A lower volume could imply more difficulty in price scaling when the bull market force returns

• In terms of Earnings per share (EPS), i has missed 2 and exceeded 2 of its EPS forecast in past 4 quarters. Performance wise, it fares better than DX.

• It is a fact that the Fed will keep interest rate elevated for the remaining of 2023 and going into 2024.

• It is a fact that elevated interest rates have kept home sales at bay because mortgage rates are at an all time high.

• Given the above 2 factors, what is/are the probability that REITS will be able to shine in such “high costs to do business environment”?

• According to a report by S&P Global, over the past 25 years, REITs have emerged as a popular and efficient way for market participants of all stripes to access the real estate asset class.

• Strong long-term total returns, combined with other key investment characteristics such as [a] liquidity, [b] high dividend yields, and [c] potential to increase diversification and to hedge against inflation, have contributed to the appeal of REITs.

• Although interest rates certainly affect real estate values and, therefore, the performance of REITs, rising interest rates do not necessarily lead to poor returns.

• Since the early 1970s, there have been 6 periods where 10-Year U.S. Treasury Bond yields rose significantly.

• In 4 of the 6 periods, US REITs earned positive total returns, and in half of those periods, US REITs outperformed the S&P 500.

• According to Nareit, over longer periods, there has generally been a positive association between periods of rising rates and REIT returns.

• This is because rising rates generally reflect improvement in the underlying fundamentals.

• A REIT.com blog post stated that historically, REITs have performed well during periods of rising long-term interest rates with an average four-quarter return in periods with rising rates of 16.55% compared to 10.68% in non-rising rate periods.

• Above conclusions were based on sampling period of Q1 1992 to Q4 2021.

• In summary, while rising interest rates can affect the performance of REITs in the short term, there is no clear evidence that they will lead to poor returns over the long term.

In case you are interested, my other “PICK” posts. Enjoy:

• NIO - Buy now, Wait or Sell? Read & decide. Click here! to read & “like” ok. Thanks.

• S&P 500 in recession, soft landing or golden path? Click here! to read.

• XPev, NIO, Chpt - Top 3 EVs must buy in Q4 2023? Click here! to read.

• Do you think you will consider adding REITS to your portfolio (maybe DX or EFC)?

• Do you think REITS will fare better as medium to long term investments?

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