- My calculation suggests a $0.9702 MORL dividend in April. This is a 20.2% increase over the January 2014 dividend of $ 0.8072.
- The reason for the increase is that 5 of the 21 components the go ex-date in March have increased their dividends and none have cut them.
- On a monthly compounded basis, the effective annualized yield is 20.7%.
All of the 25 mREITs that comprise ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) and Market Vectors Mortgage REIT ETF (NYSEARCA:MORT) that will have ex-dividend dates in March 2014 have announced their dividends. Thus, it is now possible to calculate a projection for the monthly dividend that MORL will soon declare for the month of April 2014 and the quarterly dividend that MORT will soon declare for the 1st quarter of 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. 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 ex-dates of the 25 mREITs are shown in the table below. I have included every mREIT that goes ex-dividend in March 2014 in the April dividend projection calculation.
As the table below indicates, of the 25 mREITs that comprise the portfolios of MORL and MORT, 21 of them go ex-dividend in March 2014. Most of those will have pay dates in April 2014. One component of MORT and MORL, iStar Financial Inc. (NYSE:STAR), has still not reinstated its dividend. PennyMac Mortgage Investment Trust (NYSE:PMT) went ex-dividend on January 8, 2014 with a pay date of January 28, 2014. Most likely it will go ex-dividend and pay in April. I have not included PMT in the calculation, however, some may think that MORL bases it payment on the pay date rather than the ex-date. If that were the case then if PMT has a pay date in April 2014 it should be included.
Likewise, RAIT Financial Trust (NYSE:RAS) and Dynex Capital Inc (NYSE:DX) both will go ex-dividend on April 2, 2014 with pay dates of April 30, 2014. I have not included those in the April dividend calculation even though they have declared dividends that will be paid in April 2014. I have included NorthStar Realty Finance Corp. (NYSE:NRF), Redwood Trust Inc (NYSE:RWT), Newcastle Investment Corp (NYSE:NCT), New Residential Investment Corp. (NYSE:NRZ) and Winthrop Realty Trust (NYSE:FUR) which have both ex-and pay dates in March 2014. The very low $.0171 March 2014 MORL dividend supports the argument that MORL dividends are based on ex-dates not pay dates. 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 every month.
For those who wish to try this at home, the actual math involved is to start with the weight of each component. For example, this is 13.03% for Annaly Capital Management Inc (NYSE:NLY). Then use the 8,300,000 million shares outstanding for MORL and the net asset value of MORL of $22.1359 as of March 21, 2014. Using that and the market price of NLY of $11.48 indicates a value of MORL's position in NLY of $47.88 million taking into account the 2X leverage. Applying the NLY price implies a share count for the NLY position of 4.17 million. Multiplying the share count by the dividend gives a dollar amount. Adding the dividend amount for each of the components that have March ex-dates and subtracting out expenses based on a .80% expense ratio that includes interest expense gives a net figure of $8.05 million which results in a dividend of $0.9702 based on 8.3 million shares outstanding.
My calculation suggests a $0.9702 MORL dividend in April. This is a 20.2% increase over the January 2014 dividend of $ 0.8072. This may be surprising to some. The reason for the increase is that 5 of the 21 components the go ex-date in March have increased their dividends and none have cut them. Those increasing their dividends include the number 3 and 4 most important components: NRF which increased its payout from $0.21 to $0.25 and Starwood Property Trust Inc (NYSE:STWD) which increased its payout from $0.46 to $0.48.
One complicating factor with MORL is the expense ratio. Various retail brokerage firms like Schwab, Fidelity and Scottrade indicate that both the net and gross expense ratio for MORL is 0.35%. Since MORL is an Exchange Traded Note rather than a fund it does not make the disclosures about fees that funds do. UBS does indicate that there is a 0.40% tracking fee and that there is an interest expense on the half of the assets that are borrowed based on the LIBOR rate. From that I estimate a .80% net expenses ratio. The effect on the dividend is not very large if the lower expense ratio of .35% is used. Instead of a $0.9702 April dividend for MORL, the lower expense ratio of .35% results in a $0.9785 April dividend for MORL.
MORT is much simpler, the shares of each position are public information and the published expense ratio is 0.41%. The same exercise results in a projected dividend of $0.595 for MORT. This compares to the $0.58 last quarter. Another fund that holds mREITs, iShares Mortgage Real Estate Capped ETF (NYSEARCA:REM) last declared a quarterly dividend of $0.48 with an ex-date of December 23, 2013 and payable December 30, 2013. The previous quarterly dividend for REM was $0.42. The September payment was a decline of 20.2% from June. REM's dividend may not be that useful in projecting dividends for MORL and MORT since REM can have significant trading gains.
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 $0.97 for the April 2014 MORL dividend is accurate, the annualized dividends based on the most recent three-months ending in April 2014 would be $4.20. This is considerably more than the three-months ending in March 2014 of $3.55. It would then be about slightly more than the $4.18 for the three months ending in December 2013.
If the projection of $0.97 for the April 2014 MORL dividend is accurate, this is a 19.0% simple annualized yield with MORL priced at $22.11. On a monthly compounded basis, the effective annualized yield is 20.7%.
If someone thought that over the next five years interest rates would remain relatively stable and thus MORL would continue to yield 20.7% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $256,442 in five years. More interestingly, for those investing for future income the income from the initial $100,000 would increase from the $20,725 initial annual rate to $53,148 annually.
Holdings of MORL and MORT as of March 21, 2014
Annaly Capital Management Inc
American Capital Agency Corp
NorthStar Realty Finance Corp
Starwood Property Trust Inc
Two Harbors Investment Corp
MFA Financial Inc
Invesco Mortgage Capital Inc
Chimera Investment Corp
Hatteras Financial Corp
Redwood Trust Inc
Colony Financial Inc
PennyMac Mortgage Investment Trust
Newcastle Investment Corp
New Residential Investment Corp
ARMOUR Residential REIT Inc
CYS Investments Inc
iStar Financial Inc
Capstead Mortgage Corp
American Capital Mortgage Investment Corp
Anworth Mortgage Asset Corp
Resource Capital Corp
Apollo Commercial Real Estate Finance Inc
RAIT Financial Trust
Dynex Capital Inc
Winthrop Realty Trust