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Summary

  • My calculation is that the May monthly dividend paid by MORL will be $0.0679.
  • At some point in the future there should be some beneficial impact from the reinvestment of higher yielding mortgage securities entering the mREITs portfolios.
  • If the projection of $.0679 for the May 2014 MORL dividend is accurate, on a monthly compounded basis, the effective annualized yield is 22.2%.

All of the 24 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 April 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 May 2014

As I explained in 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 April 2014 in the May dividend projection calculation.

As the table below indicates, of the 24 mREITs that comprise the portfolios of MORL and MORT, 4 of them go ex-dividend 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) goes ex-dividend on April 14, 2014 with a pay date of April 30, 2014. 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 included those in the May dividend calculation even though they have declared dividends that will be paid in April 2014. 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.

My calculation suggests a $0.0679 MORL dividend in May. This is a 9.5% increase over the February 2014 dividend of $ 0.0620. This is a more meaningful month to use for comparison to a "small month" dividend than the $0.0171 March dividend. For those who may wish to replicate my calculation at home, the methodology was described in detail in my article: MORL Dividend Projected To Rise Sharply In April

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 estimated a .80% net expenses ratio when I calculated a projection for the April "large month" dividend in MORL Composition Changes Indicate Higher April Dividend And Yield Of 22%. My estimate was slightly less than the actual April divided. That may have been due to the higher expense ratio. Therefore I use .40% for the May calculation. The effect on the dividend is not very large if the lower expense ratio of .35% is used. Instead of a $0.0679 May dividend for MORL, the lower expense ratio of .35% results in a $0.0688 MORL dividend for MORL.

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 $.0679 for the May 2014 MORL dividend is accurate, the annualized dividends based on the most recent three-months ending in May 2014 would be $4.39. This is considerably more than the three-months ending in March 2014 of $3.55. It would then be slightly more than the $4.37 for the three months ending in April .

If the projection of $.0679 for the May 2014 MORL dividend is accurate, this is a 20.2% simple annualized yield with MORL priced at $21.73. On a monthly compounded basis, the effective annualized yield is 22.2%.

If someone thought that over the next five years interest rates would remain relatively stable and thus MORL would continue to yield 22.2% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $272,393 in five years. More interestingly, for those investing for future income the income from the initial $100,000 would increase from the $22,200 initial annual rate to $60,471 annually.

Holdings of MORL and MORT as of April 30, 2014

price

% of Index

ex-date

pay date

dividend

NLY

Annaly Capital Management Inc

$11.52

17.70%

28-Mar

30-Apr

$0.30

AGNC

American Capital Agency Corp

$22.62

12.92%

27-Mar

28-Apr

$0.65

NRF

NorthStar Realty Finance Corp

$14.56

8.00%

6-Mar

14-Mar

$0.25

STWD

Starwood Property Trust Inc

$23.72

6.08%

27-Mar

15-Apr

$0.48

TWO

Two Harbors Investment Corp

$10.36

5.82%

27-Mar

21-Apr

$0.26

CIM

Chimera Investment Corp

$3.08

4.46%

27-Mar

24-Apr

$0.09

MFA

MFA Financial Inc

$7.91

4.16%

27-Mar

28-Apr

$0.20

CLNY

Colony Financial Inc

$20.51

4.10%

27-Mar

15-Apr

$0.35

IVR

Invesco Mortgage Capital Inc

$16.51

3.62%

27-Mar

28-Apr

$0.50

NCT

Newcastle Investment Corp

$4.41

3.62%

21-Mar

25-Mar

$0.10

NRZ

New Residential Investment Corp

$6.12

3.39%

27-Mar

31-Mar

$0.18

PMT

PennyMac Mortgage Investment Trust

$22.80

3.21%

14-Apr

30-Apr

$0.59

ARR

ARMOUR Residential REIT Inc

$4.23

2.99%

13-Mar

28-Mar

$0.05

HTS

Hatteras Financial Corp

$19.53

2.89%

26-Mar

25-Apr

$0.50

CYS

CYS Investments Inc

$8.58

2.73%

21-Mar

17-Apr

$0.32

CMO

Capstead Mortgage Corp

$12.65

2.37%

27-Mar

17-Apr

$0.34

RWT

Redwood Trust Inc

$21.60

2.16%

12-Mar

31-Mar

$0.28

BXMT

Blackstone Mortgage Trust Inc

$28.43

2.03%

27-Mar

15-Apr

$0.48

MTGE

American Capital Mortgage Investment Corp

$19.80

1.72%

27-Mar

28-Apr

$0.65

ANH

Anworth Mortgage Asset Corp

$5.39

1.39%

27-Mar

29-Apr

$0.14

RSO

Resource Capital Corp

$5.47

1.31%

27-Mar

28-Apr

$0.20

RAS

RAIT Financial Trust

$7.98

1.31%

2-Apr

30-Apr

$0.17

ARI

Apollo Commercial Real Estate Finance Inc

$16.52

1.09%

27-Mar

14-Apr

$0.40

DX

Dynex Capital Inc

$8.50

0.93%

2-Apr

30-Apr

$0.25

Disclosure: I am long MORL, 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.

Source: MORL Is Projected To Pay A Monthly Dividend In May Of $0.0679 Bringing The Yield To 22.2%