# My Projection Of MORT's Dividend Was Exactly Correct, Implications For MORL

Using the data available on December 19, 2013 when all of the 26 mREITs that comprise ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) and Market Vectors Mortgage REIT ETF (NYSEARCA:MORT) had announced their dividends for 2013, I projected in a Seeking Alpha article published on December 22, Projecting The Upcoming Dividends For MORL And MORT the monthly dividend that MORL will soon declare for the month of January 2014 and the quarterly dividend that MORT declared on December 27, 2013 for the 4th quarter of 2013 payable in January 2014.

My projection for MORT's 4th quarter dividend was exactly correct at \$0.58. I had calculated the dividend by adding up the total cash value of each of the dividends paid by the components of MORT (the total cash dividends are the dividends per share multiplied by the number of shares held by MORT). Then dividing by the number of shares outstanding and adjusting for expenses.

In addition to the regular quarterly dividend of \$0.58 with an ex-date of December 27, 2013 and a pay-date of January 3, 2014 MORT declared a special distribution \$0.8704 with the same ex-date and pay-date. My correct projection of the regular quarterly dividend of \$0.58 has favorable implications for my projection that the monthly dividend that MORL will soon declare for the month of January 2014 will be \$0.79.

The correct calculation of MORT's regular \$.58 dividend suggests, at least, that my numbers in the above mentioned Seeking Alpha article published on December 22 were correct. I used the same procedure to calculate MORL's expected dividend, taking into account the 2X leverage and interest expenses. The special distribution \$0.8704 that MORT declared does not have any implications for MORL.

MORL is an exchanged traded note or ETN while MORT is an exchanged traded fund or ETF. MORT is just like any other mutual fund that makes distributions of capital gains from transactions in its portfolio. It must keep at least 80% of its assets in the actual mREITs specified in its prospectus. It has some leeway as to the timing of portfolio purchases and sales of mREITs and thus can generate capital gains which must be distributed to shareholders according to the Investment Company Act.

An exchanged traded note such as MORL must pay dividends, which are actually interest, to the shareholders based on the dividends paid by the mREITs that comprise the portfolio adjusted for the 2X leverage and interest expenses. While it is assumed that Union Bank of Switzerland, now UBS AG (NYSE:UBS) actually holds the mREITs in MORL's portfolio , they are not required to do so legally. Thus, MORL is an unsecured bond of UBS. Given that it is one of the strongest banks in the world there is not much risk that UBS will default and certainly UBS is stronger financially than any of the mREITs in MORL or MORT.

There are a few caveats for my MORL dividend projection. MORL passes through the dividends based solely of the dividends paid by the mREITs that comprise the portfolio. 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 (NYSE: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 (NYSE:RAS) will pay in January was not included since it has an ex-date of January 3, 2014. It is possible that the management of MORL 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 mREITs that have ex-dates in December, Cypress Sharpridge Investments (NYSE:CYS) and Redwood Trust Inc (NYSE: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. Armour Residential REIT (NYSE: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 Annaly Capital (NYSE:NLY), American Capital Agency Corp. (NASDAQ:AGNC), Two Harbors Investment Corp. (NYSE:TWO), MFA Financial Inc. (NYSE:MFA), Hatteras Financial Corp. (NYSE:HTS), ARR, CYS, American Capital Mortgage (NASDAQ:MTGE) and Anworth Mortgage Asset Corp (NYSE: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 (NYSE:DX) went ex-dividend in October 2013, HTS went ex-dividend before September 2013

As I explained in the 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.

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 my 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 22.2% simple annualized yield with MORL priced at \$18.70. On a monthly compounded basis, the effective annualized yield is 24.7%.

If someone thought that over the next five years interest rates would remain relatively stable and thus MORL would continue to yield 24.7% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of \$100,000 would be worth \$301,053 in five years. More interestingly, for those investing for future income, the income from the initial \$100,000 would increase from the \$24,700 initial annual rate to \$74,360 annually.

Disclosure: I am long MORL, AGNC, CYS, RAS, ARR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.