Four of the 26 mREITs that comprise ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL) have announced dividends with ex-dates in January 2014. Using that information I have projected a monthly dividend of $0.1774 for MORL for the month of February 2014. This will be the largest "small month" dividend that MORL has ever declared. It will be 7.9% larger than the $0.1643 dividend MORL paid in November 2013.
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.
The January, April, October and July "big month" MORL dividends are much larger than the "small month" dividends paid in the other months since about 80% of the portfolio pays quarterly, typically with ex-dates in the last month of the quarter and payment dates in the first month of the next quarter.
The four mREITs that have ex-dates in January are: Chimera Investment Corp (CIM) which declared a $0.20 special dividend that will be paid on January 31, 2014 with an ex-date of January 6, 2014 CIM comprises 5.14% of MORL's assets. Pennymac Mortgage Investment (PMT) which declared a $0.59 quarterly dividend with an ex-date of January 8 and a pay date of January 28, 2014. PMT comprises 3.48% of MORL's assets. 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 each month. ARR comprises 3.4% of MORL's assets. RAIT Financial Trust (RAS) which declared a $0.16 quarterly dividend with an ex-date of January 3 and a pay date of January 31, 2014. RAS comprises 1.01% of MORL's assets.
MORL is projected by me to be paying a higher dividend in February 2014 than it did in November 2013, December 2013 or any other "small month. This appears odd since many mREITs have reduced their dividends. The list of mREITs who have recently reduced dividends includes: ARR, Annaly Capital (NLY), American Capital Agency Corp. (AGNC), Two Harbors Investment Corp (TWO), MFA Financial Inc (MFA), Hatteras Financial Corp (HTS), Cypress Sharpridge Investments (CYS) , American Capital Mortgage (MTGE) and Anworth Mortgage Asset Corp (ANH).
The CIM special dividend is most likely the reason for the projection of the February 2014 dividend being higher than any other small month dividend. There are a few caveats with my dividend projections. 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 calculation of the January dividend the $0.20 special dividend that CIM declared that will be paid in January but has an ex-date of January 6, 2014 and did include that special dividend in the February 2014 calculation. Likewise the $0.16 dividend that RAIT Financial Trust will pay on January 31, 2014 was not included in the January dividend calculation, but rather in the February 2014 dividend calculation since it has an ex-date of January 3, 2014.
It is possible that the management of MORL could have included dividends that were 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 had ex-dates in December: CYS and Redwood Trust Inc (RWT) and also paid in December. I thus included CYS and RWT in the January dividend calculation since their announcements were probably too late to be included in the December monthly dividend. Furthermore, as I indicated in: MORL's Net Asset Value Rises - Implications For The Dividends the dividends paid by a leveraged ETN like MORL are impacted by the net asset value of the ETN. Thus, if MORL increases its net asset value between January 17, 2014, when this projection was done, and the end of the month, the dividend might be higher. Likewise, a decline in the net asset value could reduce the February 2014 monthly dividend.
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 5/8 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 $0.1774 for the February 2014 MORL dividend is accurate, the annualized dividends based on the most recent three-months ending in February 2014 would then be about $4.29. This is the highest annualized three-month since September 2013. The $4.29 annual rate is a 22.5% simple annualized yield with MORL priced at $19.11. On a monthly compounded basis, the effective annualized yield is 24.9%.
If someone thought that over the next five years interest rates would remain relatively stable and thus MORL would continue to yield 24.9% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $304,255 in five years. More interestingly, for those investing for future income the income from the initial $100,000 would increase from the $24,900 initial annual rate to $76,368 annually.