Ellington Credit Company: Navigating Regulatory Shifts to Sustain High Dividends

Ellington Credit Company (NYSE: EARN), formerly a residential mortgage REIT, has undergone a dramatic strategic transformation in recent years, pivoting from agency mortgage-backed securities (MBS) to corporate collateralized loan obligation (CLO) investments. This shift, coupled with its transition from a REIT to a Regulated Investment Company (RIC), has raised questions about the sustainability of its $0.08 monthly dividend—a policy that has held steady since early 2024, yielding over 14% annually. Below, we analyze whether Ellington can maintain this dividend in the face of evolving market risks and regulatory changes.

Dividend Consistency Amid Structural Overhaul

Ellington's dividend policy has been remarkably consistent, with no cuts since its strategic pivot began. As of July 2025, the company has maintained a $0.08 monthly payout since January 2024, yielding 13.7%–14.7% based on its share price of $6.12–$6.99. This stability is notable given its ongoing transition from a REIT to a RIC, which involves significant regulatory and operational shifts.

The dividend's backbone lies in its Adjusted Distributable Earnings (ADE), a non-GAAP metric that excludes unrealized gains/losses. In Q1 2024, ADE hit $0.27 per share, comfortably covering the $0.24 quarterly dividend requirement. Even in Q4 2024—a quarter that reported a net loss of $0.07 per share due to agency MBS volatility—ADE remained robust at $0.27 per share, ensuring dividend safety.

Strategic Shift: From Mortgages to CLOs

Ellington's decision to abandon its REIT structure in early 2024 was driven by the superior risk-adjusted returns of CLO mezzanine and equity tranches, which offer floating-rate income and lower interest rate sensitivity. By Q4 2024, CLO assets had grown to $171 million, representing 72% of its portfolio, while agency MBS were reduced to $512 million (from $739 million in early 2024).

This shift has two key advantages:
1. Lower Volatility: CLOs are less exposed to the negative convexity risks of agency MBS, which suffered in 2024 due to “higher-for-longer” rate expectations.
2. Higher Margins: CLO net interest margins hit 8.54% in Q4 2024, compared to 3.24% for agency MBS.

This metric shows leverage declining from 5.3x (end-2023) to 2.9x (end-2024), reflecting a deliberate de-leveraging strategy to support the transition.

Financial Health: ADE as the Safety Net

While Ellington's net income swung to a loss in Q4 2024 due to agency MBS underperformance, its ADE metric—which investors should prioritize over net income—remained stable. This is because ADE excludes unrealized losses tied to mark-to-market fluctuations in its MBS portfolio.

Key metrics as of December 31, 2024:
- Book Value: $6.53 per share, down slightly from $6.85 in Q3 but still supportive of dividends.
- Liquidity: $31.8 million in cash plus $79.2 million in unencumbered assets, providing a buffer against market shocks.

Risks and Regulatory Hurdles

1. Regulatory Transition: The RIC conversion, effective April 1, 2025, requires Ellington to sell remaining agency MBS holdings to comply with the 1940 Act. This could incur capital losses if market conditions are unfavorable.
2. CLO Market Risks: While CLOs have performed well, a downturn in corporate credit markets—driven by rising defaults or liquidity strains—could pressure returns.
3. Agency Wind-Down: Liquidating agency MBS may take longer than expected, exposing the company to further mark-to-market volatility.

Narrowing spreads (a sign of investor optimism) have boosted CLO valuations, but wider spreads could reverse this trend.

Investment Thesis: High Yield with Caution

Ellington's dividend sustainability hinges on two factors:
1. ADE Coverage: As long as ADE stays above $0.27 per share, the $0.08 monthly dividend is secure.
2. CLO Performance: Strong demand for leveraged loans and refinancing activity will continue to support CLO returns.

Investment Advice:
- Hold for Income: The 14% yield is compelling for income investors willing to tolerate volatility tied to CLO markets.
- Monitor Regulatory Progress: Track the RIC conversion's execution and agency MBS liquidation timeline for potential bumps.
- Avoid if Risk-Averse: Investors sensitive to balance sheet changes and sector-specific risks may prefer alternatives with less operational uncertainty.

Conclusion

Ellington Credit Company has navigated a complex strategic shift with its dividend intact, thanks to disciplined de-leveraging and strong CLO performance. While risks persist—particularly around regulatory compliance and CLO market dynamics—the company's focus on high-margin assets and ADE-driven distributions make its dividend policy a high-yield bet worth considering for those comfortable with its evolving profile.

This comparison highlights EARN's yield advantage, though peers like Two Harbors (TWO) have faced similar REIT-to-CLO transitions with mixed results.

Final Take: Hold with a long-term horizon, but keep an eye on CLO spreads and regulatory milestones.