MORL Projected June Dividend Brings Yield To 21.7%

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 |  About: UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL), Includes: AGNC, ARR, MORT, NLY
by: Lance Brofman

Summary

My calculation suggests a $0.0155 MORL dividend in June. On a monthly compounded basis, the effective annualized yield is 21.7%.

The prospect for future MORL dividends is mostly a function of interest rates. Higher short-term rates would lower the dividend on MORL in two ways.

At some point in the future there should be some beneficial impact from the reinvestment of higher yielding mortgage securities entering the mREITs portfolios.

Only one of the 24 mREITs that comprise ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) and Market Vectors Mortgage REIT ETF (NYSEARCA:MORT) will have an ex-dividend date in May 2014. Thus, it is now possible to project that the monthly dividend that MORL will soon declare for the month of June 2014 will be $0.0155.

This relatively low dividend is no surprise since only one component, Amour Residential REIT (NYSE:ARR), which pays monthly, goes ex-dividend during the relevant period. 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. Thus, a three-month moving average is the most relevant indicator.

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 most of the portfolio components pay quarterly, typically with ex-dates in the last month of the quarter and payment dates in the first month of the next quarter. The most recent dividends, weights and ex-dates of the 24 mREITs are shown in the table below.

My calculation suggests a $0.0155 MORL dividend in June. This is a 9.4% decrease from the March 2014 dividend of $ 0.0171. This is a more meaningful month to use for comparison to a "small month" dividend than the $0.0724 May dividend since more than one component paid in May. 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

The prospect for future MORL dividends is mostly a function of interest rates. Higher short-term rates would lower the dividend on MORL in two ways. First, the 2X leverage utilized by MORL involves an imputed interest rate cost which is based on LIBOR. Additionally, almost all of the mREITs that comprise the index upon which MORL is based also use leverage to enhance their yields. Higher short-term rates would reduce the dividends paid by the mREITs as well.

Higher long-term rates would lower the values of the mREITs that comprise the index upon which MORL is based. This would lower the value of MORL accordingly. This would tend to reduce the dividends paid by the mREITs as they sell securities to reduce leverage. Also, a lower value of MORL would reduce the dividends paid by MORL. In addition to the decline in the dividend due to the reduction in the dividends of many of the mREITs, MORL is further impacted by the rebalancing of the portfolio each month to bring the amount of leverage back to 2X. As the value of the mREITs in the portfolio declines, portfolio assets must be sold to maintain the leverage level. This reduces the dividend in addition to any reductions from cuts by the mREITs in the portfolio. This factor is of course a major cause of the reductions in many of the dividends of the mREITs in the portfolio. ARR reduced its monthly dividend over the past year from $0.11 to $0.05. The individual mREITs such as Annaly Capital Management Inc. (NYSE:NLY) and American Capital Agency Corp. (NASDAQ:AGNC) have been selling assets to bring their leverage down to their targets and in some cases reducing the leverage beyond that in response to the market volatility. The relationship between the net asset value of MORL and the dividend is explained more fully in: MORL's Net Asset Value Rises - Implications For The 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 the projection of $.0155 for the June 2014 MORL dividend is accurate, the annualized dividends based on the most recent three-months ending in June 2014 would be $4.40. This is slightly more than the three-months ending in May 2014 of $4.39 and would then be slightly more than the $4.37 for the three months ending in April 2014.

If the projection of $.0155 for the June 2014 MORL dividend is accurate, this is a 19.8% simple annualized yield with MORL priced at $22.27. On a monthly compounded basis, the effective annualized yield is 21.7%.

If someone thought that over the next five years interest rates would remain relatively stable and thus MORL would continue to yield 21.7% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $266,589 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 $59,183 annually.

Holdings of MORL and MORT as of May 23, 2014

price

% of Index

ex-date

pay date

dividend

Top of Form

NLY

Annaly Capital Management Inc

$11.76

17.89%

28-Mar

30-Apr

$0.30

AGNC

American Capital Agency Corp

$23.58

13.27%

27-Mar

28-Apr

$0.65

NRF

NorthStar Realty Finance Corp

$15.77

7.74%

6-Mar

14-Mar

$0.25

STWD

Starwood Property Trust Inc

$24.28

6.08%

27-Mar

15-Apr

$0.48

TWO

Two Harbors Investment Corp

$10.50

5.84%

27-Mar

21-Apr

$0.26

CIM

Chimera Investment Corp

$3.11

4.39%

27-Mar

24-Apr

$0.09

MFA

MFA Financial Inc

$8.18

4.21%

27-Mar

28-Apr

$0.20

CLNY

Colony Financial Inc

$21.73

4.00%

27-Mar

15-Apr

$0.35

IVR

Invesco Mortgage Capital Inc

$17.60

3.78%

27-Mar

28-Apr

$0.50

NCT

Newcastle Investment Corp

$4.74

3.77%

21-Mar

25-Mar

$0.10

NRZ

New Residential Investment Corp

$6.20

3.38%

27-Mar

31-Mar

$0.18

ARR

ARMOUR Residential REIT Inc

$4.28

2.98%

12-Jun

27-Jun

$0.05

HTS

Hatteras Financial Corp

$20.28

2.97%

26-Mar

25-Apr

$0.50

PMT

PennyMac Mortgage Investment Trust

$21.14

2.86%

30-Apr

$0.59

0.6750

CYS

CYS Investments Inc

$9.04

2.85%

21-Mar

17-Apr

$0.32

CMO

Capstead Mortgage Corp

$13.08

2.38%

27-Mar

17-Apr

$0.34

BXMT

Blackstone Mortgage Trust Inc

$28.43

2.08%

27-Mar

15-Apr

$0.48

RWT

Redwood Trust Inc

$19.34

1.88%

12-Mar

31-Mar

$0.28

MTGE

American Capital Mortgage Investment Corp

$20.41

1.76%

27-Mar

28-Apr

$0.65

RSO

Resource Capital Corp

$5.75

1.34%

27-Mar

28-Apr

$0.20

ANH

Anworth Mortgage Asset Corp

$5.33

1.33%

27-Mar

29-Apr

$0.14

RAS

RAIT Financial Trust

$7.93

1.25%

2-Apr

30-Apr

$0.17

ARI

Apollo Commercial Real Estate Finance Inc

$16.63

1.05%

27-Mar

14-Apr

$0.40

DX

Dynex Capital Inc

$8.57

0.91%

2-Apr

30-Apr

$0.25

Bottom of Form

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Disclosure: I am long MORL, AGNC, 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.