ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) declared a dividend of $0.8072 with an ex-date of January 9, 2014 payable January 22, 2014. This is a slight increase from the $0.7938 "big month" dividend paid in October 2013.
Using the data available on December 19, 2013 when all of the 26 mREITs that comprise 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 that the monthly dividend that MORL would declare for the month of January 2014 would be $0.79 and the regular quarterly dividend that MORT would declare for the 4th quarter of 2013 payable in January 2014 would be $0.58
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.
MORL's dividend of $0.8072 was slightly above my calculation of $0.79. This could be due to the fact that MORL's net asset value has increased since December 19, 2013 when I did the calculation. As I explained in: MORL's Net Asset Value Rises - Implications For The Dividends the monthly dividends are a function of MORL's net asset value. Thus, the increase in MORL's net asset value since December 19, 2013 could account the dividend being slightly higher than I has calculated.
I had also indicated that there were a few other caveats to my forecast. 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 did not include 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.
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.
The MORL January 2014 dividend is above 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 was above 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. This would suggest that unless some of the component mREITs in MORL increase their dividends we could see a lower "big month" dividend in April 2014. This could be offset however, from increase in MORL's net asset value from an improvement in the mREIT market.
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.
The annualized dividends based on the most recent three-months ending in January 2014 are $4.23, slightly more than the $4.18 for the three months ending in December 2013. This is a 21.24% simple annualized yield with MORL priced at $19.80. On a monthly compounded basis, the effective annualized yield is 23.6%.