All of the 26 mREITs that comprise ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL) and Market Vectors Mortgage REIT ETF (MORT) have announced their dividends for 2013. Thus, it is now possible to calculate a projection for the monthly dividend that MORL will soon declare for the month of January 2014 and the quarterly dividend that MORT will soon declare for the 4th quarter of 2013 payable in January 2014.
As I explained in this article 30% Yielding MORL, MORT And The mREITs: A Real World Application And Test Of Modern Portfolio Theory, MORL pays widely varying dividends each month since most of the mREITs in the basket pay dividends quarterly on various schedules. During any three-month period, usually all of the components would have paid their dividends.
Of the 26 mREITs that comprise the portfolios of MORL and MORT, 20 of them go ex-dividend in December 2013. Those include major components of the portfolios Annaly Capital (NLY) and American Capital Agency Corp. (AGNC) which have recently cut their dividends. The 20 mREITs that will go ex-dividend in December 2013 comprise 80.69% of the portfolios as of December 19, 2013. The table below shows the % of net assets that each of the 26 mREITs represent in the portfolios. MORT and MORL have the same portfolio composition. The difference is that MORL is 2X leveraged and pays monthly while MORL is not leveraged and pay quarterly.
The January, April, October and July "big month" MORL dividends are much larger than the "small month" dividends paid in the other months. This is because about 80% of the portfolios pay quarterly. They typically have ex-dates in the last month of the quarter and payment dates in the first month of the next quarter. The December 2013 ex-dates of the 20 mREITs are shown in the table below. I have included every mREIT that goes ex-dividend in December 2013 in the calculation.
From that data I calculated a $0.79 monthly dividend for MORL in January and 4th quarter dividend of $0.58 for MORT. There are a few caveats. Both MORL and MORL pass-through their dividends based solely of the dividends paid by the mREITs that comprise their portfolios. However, they may have some discretion on how they treat certain timing issues. Thus, I have not included in the calculations the $0.20 special dividend that Chimera Investment Corp (CIM) recently declared that will be paid in January but has an ex-date of January 6, 2014. Likewise the $0.16 dividend that RAIT Financial Trust (RAS) will pay in January was not included since it has an ex-date of January 3, 2014. It is possible that the managements of MORL and MORT could include dividends that are declared to be paid in January in the January dividend even if they have ex-dates in January. On the other hand two of the mREIT that have ex-dates in December, Cypress Sharpridge Investments (CYS) and Redwood Trust Inc (RWT) also pay in December. I have included CYS and RWT since their announcements were probably too late to be included in the December monthly dividend. Amour Residential REIT (ARR) pays monthly and they have announced their dividends for the next 12 months, so it is certain that the ARR dividend of $0.05. will be included in both months.
My projection of $0.79 for the MORL January dividend is very close to the $0.7938 "big month" dividend paid in October 2013. This appears odd since as is shown in the table, NLY, AGNC, Two Harbors Investment Corp (TWO), MFA Financial Inc (MFA), Hatteras Financial Corp (HTS), ARR, CYS, American Capital Mortgage (MTGE) and Anworth Mortgage Asset Corp (ANH) all reduced their dividends from the amounts paid three months ago. All of the other mREITs with ex-dates in December did not change their dividends.
One explanation for why the January MORL dividend will be so close to the October 2013 dividend is that some of the mREITs that go ex-dividend in December 2013 did not go ex-dividend in September 2013 and thus may not have been included in the October 2013 MORL big dividend. MFA and Dynex Capital Inc (DX) went ex-dividend in October 2013, HTS went ex-dividend before September 2013
MORT declared a quarterly dividend of $0.615 with an ex-date of October 1, 2013 and payable October 7, 2013. This was a surprising increase of 2.5% from the quarterly dividend of $0.60 with an ex-date of July 1, 2013. The projection of $0.58 for the 4th quarter of 2013 MORT dividend is based on the 20 mREITs that go ex-dividend in December 2013 plus the 5 other mREITs that go ex-dividend in the other months of the quarter. One component of MORT and MORL, iStar Financial Inc. (STAR), has still not reinstated its' dividend.
The 2.5% increase in the sequential quarterly dividend for MORT was surprising since iShares Mortgage Real Estate Capped ETF (REM) had declared a quarterly dividend of $0.420583 with an ex-date of September 24, 2013 and payable September 30, 2013. The previous quarterly dividend for REM was $0.527335. The September payment was a decline of 20.2% from June. (See: REM Dividend Cut's Implications For mREIT ETFs And ETNs)
At some point in the future there should be some beneficial impact from the reinvestment of higher yielding mortgage securities entering the mREITs portfolios. Newly issued mortgage-backed securities usually settle about two months after the purchase date. Each month an mREIT generally receives principal payments on its mortgages of about 3/4 of a percent of the outstanding balance. As I indicated in my article: Federal Reserve Actually Propping up Interest Rates: What this means for mREITs, higher long-term rates while short-term rates remain low actually increases the spread income of agency mREITs.
If the projection of $0.79 for the January 2013 MORL dividend is accurate. The annualized dividends based on the most recent three-months ending in January 2013 would then be about $4.16, only slightly less than the $4.18 for the three months ending in December. This is a 22.9% simple annualized yield with MORL priced at $18.42. On a monthly compounded basis, the effective annualized yield is 25.4%.
If someone thought that over the next five years interest rates would remain relatively stable and thus MORL would continue to yield 25.4% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $310,238 in five years. More interestingly, for those investing for future income the income from the initial $100,000 would increase from the $25,400 initial annual rate to $78.838 annually.
Holdings of MORL and MORT as of December 19, 2013 and December 2013 ex-dates
% of net assets
Annaly Capital M
American Capital Agency Corp
Starwood Property Trust Inc
Northstar Realty Finance Corp
Chimera Investment Corp
Two Harbors Investment Corp
MFA Financial Inc
Invesco Mortgage Capital
New Residential Investment
Hatteras Financial Corp
Newcastle Investment Corp
Pennymac Mortgage Investment
Redwood Trust Inc
Armour Residential Reit Inc
Colony Financial Inc
Cypress Sharpridge Investment
Istar Financial Inc
Capstead Mortgage Corp
American Capital Mortgage In
Resource Capital Corp
Anworth Mortgage Asset Corp
Rait Financial Trust
Apollo Commercial Real Estate
Dynex Capital Inc
Winthrop Realty Trust