- My calculation suggests a $1.12 MORL dividend in July. On a monthly compounded basis, the effective annualized yield is 24.5%.
- This is the highest monthly payment since April 2013.
- 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.
All but 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) have announced their upcoming dividends. PennyMac Mortgage Investment (NYSE:PMT) last paid a dividend on April 30, 2014 and will likely declare a dividend with an ex-date in July or August 2014. Thus, its last dividend can be used to project the upcoming quarterly dividend for MORT. PMT will most likely not be included for the monthly dividend that MORL will pay in July.
Both MORT and MORL are based on the Market Vectors® Global Mortgage REITs Index and thus have the same portfolios in terms of the weights of each component. Projecting the upcoming dividends for either MORT or MORL involves calculating the dividends that will be paid by each of the mREITs that comprise the portfolios and then dividing the total amount of dividends paid by the number of shares outstanding and adjusting for expenses. The table below lists the weight, ex-date, pay-date and dividend for each of the components.
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. Another mREIT based fund iShares Mortgage Real Estate Capped ETF (NYSEARCA:REM) will also soon announce its quarterly dividend. It has a portfolio based on a different index of mREITs with 36 components. I recently projected a dividend of $0.30 for REM for the upcoming quarter in: How Does REM Pay That 15% Dividend? This would be a sharp decline from recent dividends for reasons discussed the article.
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. Amour Residential REIT (NYSE:ARR) pays monthly, so its dividend is included in every monthly MORL distribution.
The only components not included in my MORL July dividend calculation are: PMT, Northstar Realty Finance (NYSE:NRF), RAIT Financial Trust (NYSE:RAS) which declared an $0.18 dividend payable July 31, 2014, but has an ex-date of July 9, 2014 and Dynex Capital (NYSE:DX) which also has a pay date of July 31, 2014, but has an ex-date of July 1, 2014. Even though RAS and DX will pay in July I have not included them in the July MORL dividend calculation since their ex-dates are not in June 2014.
The only component mREITs whose dividends listed in the table below that have changed from the previous payment are RAS whose dividend of $0.18 is an increase from the prior $0.17 and Colony Financial (NYSE:CLNY) whose $0.36 quarterly payment is up from the previous $0.35.
My calculation suggests a $1.12 MORL monthly dividend in July 2014. This is the highest monthly payment since April 2013. It is a 10.6% increase from the April 2014 dividend of $ 1.0129. It is also a 4.5% increase over the July 2013 dividend of $1.1045. This is the first ever year-over-year increase in a big month MORL dividend. For MORT my projection is for a quarterly dividend of $0.59 to be paid in July 2014. This would be an increase of 7.3% from the previous $0.55 paid in April 2014.
The higher dividend for MORL is due to the increase in the CLNY payout and an increase in the net asset value of MORL. Higher net asset value increases the dividend paid by a leveraged instrument such as MORL. 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.
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.
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 my projection of $1.12 for the July 2014 MORL dividend is accurate, the annualized dividends based on the most recent three-months ending in July 2014 would be $5.05. This is 9.3% more than the three-months ending in June 2014 of $4.62 and would be 5.7% more than the $4.37 for the three months ending in April 2014.
If the projection of $1.12 for the July 2014 MORL dividend is accurate, this is a 22.1% simple annualized yield with MORL priced at $22.84. On a monthly compounded basis, the effective annualized yield is 24.5%.
If someone thought that over the next five years interest rates would remain relatively stable and thus MORL would continue to yield 24.5% on a monthly compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $298,797 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $24,500 initial annual rate to $73,205 annually.
Holdings of MORL and MORT as of May 23, 2014:
% of net assets
Annaly Capital M
American Capital Agency Corp
Northstar Realty Finance Cor
Starwood Property Trust Inc
Two Harbors Investment Corp
Chimera Investment Corp
Mfa Financial Inc
Colony Financial Inc
Newcastle Investment Corp
Invesco Mortgage Capital
New Residential Investment
Armour Residential Reit Inc
Pennymac Mortgage Investment
Hatteras Financial Corp
Cypress Sharpridge Investmen
Capstead Mortgage Corp
Blackstone Mortgage Tru-Cl A
Redwood Trust Inc
American Capital Mortgage In
Resource Capital Corp
Anworth Mortgage Asset Corp
Rait Financial Trust
Apollo Commercial Real Estat
Dynex Capital Inc