Very few things in the stock market are certain. Share price, earnings, market sentiment, and breaking news stories are all variables that are constantly changing on a day-to-day or month-to-month basis. However, there is one thing that is a certainty and guarantees you a consistent return: dividends! But before you stuff your portfolio with high-yielding stocks, there are several important things to consider about companies with large dividends. Let’s compare three mortgage investment companies that pay large dividends and look for possible causes for concern: Arlington Asset Investment Corp (NYSE: AI), Ellington Financial (NYSE: EFC) , and PennyMac Mortgage Investment Trust(NYSE: PMT) .

The good thing about dividends is that the dividend payment schedule and dividend amount typically stay the same regardless of the share price of a stock. In that sense, dividends are usually immune to the swings of market cycles.

Paying the bills

From a company’s perspective, dividend payments are like bills the company pays to its shareholders. As long as the company is earning enough money, it has no problem paying its bills. However, there is one major difference between a company’s dividend payments and your car payment: if a company can’t comfortably make its dividend payments, it can simply cut its payments! So while dividend payments ideally would be something a shareholder can count on, dividends can only truly be relied on as long as the company is in a position to maintain them.

It’s not always easy to predict a company’s future when it comes to dividends, but there are some simple numbers that I always like to check when it comes to high-yielding stocks. First, I want to look at the annual dividend yield. The annual dividend yield is calculated by dividing the total annual dividend payments per share of stock by the current share price of a stock. I also always like to look at some general valuation metrics such as price-to-earnings ratio (P/E )and forward price-to-earnings ratio (Fwd. P/E) to get a sense of how expensive the stock is. These ratios are calculated by dividing the share price by the previous year’s earnings per share (EPS) and the upcoming year’s projected EPS.

In the first round of analysis, I’m looking for anything in the P/E ratios that would tell me that the stock is overpriced. All three of these companies have similar ratios, and they are all relatively low compared to the market as a whole, so no red flags so far.

The first red flag

Now that we’ve looked at P/E ratios, let’s look at how much wiggle room these companies have when it comes to their dividend payments. To get a snapshot of how quickly a company might be forced to cut its dividends during a downward turn in the economy, I look at a number called the payout ratio . The payout ratio is simply the dividend per share divided by the earnings per share. This number gives a quick indication of how much of the company’s profits are going straight into the shareholder’s pockets in the form of dividend payments.

Ideally, I like to see payout ratios under 50%, but yields are typically high for this industry, so I am fine with the 60%-ish ratios of Ellington and PennyMac. However, Arlington Assets has raised our first red flag of the process. Its low forward P/E ratio indicates that the company is expected to grow its earnings over the next year, meaning that there is a chance that it could maintain its current dividend. If it increases its earnings enough, the payout ratio will drop accordingly. For example, if Arlington Assets continues to pay the same dividend next year, but its EPS doubles, it’s payout ratio will be cut in half to a reasonable 58%. However, any unexpected turn in the market or miscalculation in the company’s earnings projections could put the company in the tough spot where its dividend “bill” is higher than its company “paycheck,” and shareholders could be in for a dividend slash.

Learning from History

The final metric I like to look at when it comes to the dependability of dividends is a company’s history of payments.

Looking at the breakdown of dividend payments over the past three years, I see no red flags, as all three companies were able to maintain or boost their payments.

The results are in!

There is no question that the large dividends that these three companies pay could be a major, reliable source of income for shareholders. However, Arlington Asset’s large payout ratio might be a cause for concern for shareholders at some point down the line. PennyMac Mortgage’s nearly 11% dividend doesn’t raise any red flags for me. However, my pick of the three would be Ellington Financial, which has boosted its dividend by over 50% during the past three years while maintaining a payout ratio that is relatively low for its industry.