UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) declared a dividend of $0.0802 with an ex-date of August 8, 2014 and a pay date of August 20, 2014. This was exactly, to the fourth decimal point, what I had projected in my article:MORL August Dividend Projected To Bring Yield To 22.2% published on July 16, 2014. The methodology that I employed was described in detail in that article and is based on calculating the amount of the dividends that will be paid by each of the components that comprise the portfolio of an ETN. In that article, I included all of the intermediate numbers and calculations used to obtain the $0.0802 prediction.
Only four of the 24 mREITs that comprise MORL and Market Vectors Mortgage REIT ETF (NYSEARCA:MORT) had ex-dividend dates in July 2014. Those four components are: Armour Residential REIT (NYSE:ARR), which pays monthly, and thus goes ex-dividend during the relevant period, PennyMac Mortgage Investment Trust (NYSE:PMT) which went ex-dividend July 11, 2014, RAIT Financial Trust (NYSE:RAS) which went ex-dividend July 11, 2014, and Dynex Capital Inc. (NYSE:DX) which went ex-dividend July 1, 2014. Thus, the calculation was relatively easy.
This relatively low dividend is no surprise since those four components comprise a total of only 8.6% of the portfolios. 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.
Possibly of more interest to investors in MORL, is my view that the outlook for the mREIT sector may be undergoing a subtle more favorable shift. I think that the outlook for short-term interest rate to remain very low for a longer period than most market participants believe, is improving. In my recent article: Can mREITs Live Happily Ever After? I described a few scenarios where interest rates could remain low for an extended period and one possible scenario where mREITs could do well even in a rising-rate environment.
The shift I now feel may be occurring, is one away from the view that the Federal Reserve must raise short-term rates sooner or later, to one of questioning why there must be such a rate increase. One way of looking at the policy argument is: that unless interest rates are increased there is a dangerous risk that many of those now unemployed, under-employed or too discouraged to even look for work, might become employed. Even worse is that after those people become employed it might tend to increase wages. I do not see many politicians arguing that we need government action to prevent higher employment and/or higher wages.
An op-ed by Paul Krugman in the New York Times, Who Wants a Depression? claimed that the wealthy and powerful wanted higher interest rates since they "get a lot of their income from bonds and other interest-paying assets." This suggests that Paul Krugman may not converse much with those on Wall Street who have carry trades on. Also, that he definitely is not tuned-in to the wishes of almost all of those who control and/or own the corporations in America. Most of corporate America benefits from low interest rates both as it increases demand for their products and lowers their borrowing costs.
Krugman justly pointed out that he was correct that higher inflation and higher interest rates were not a threat over the last five years. Those that warned that the monetary and fiscal stimulus would result in higher inflation and higher interest rates were wrong, at least so far. However, his allegation that the rich and powerful are pushing for higher interest rates is wrong. Bond holders are usually no more likely to complain that lower interest rates reduces their interest income than stockholders complain that a rising stock market lowers their dividend yields.
Krugman would probably be the first to agree that even with the Democrats controlling the White House and the Senate, the rich have gotten about 99% of what they wanted in terms of tax and spending policy. If the rich and powerful were really pushing for higher interest rates, isn't it strange that for the last five years they have not been able to have the Federal Reserve do their bidding, even in slightest. As far back as Andrew Jackson's attack on the Bank of the United States, populists have always asserted that any central bank will always follow the interests of the moneyed classes.
There are some powerful people calling for higher interest rates. However deluded they may be in Krugman's view, they are sincere in their beliefs and their push for higher interest rates is in many cases against their economic interests. The key point is that, other than a few inflation hawks who are in danger of becoming "boys who cried wolf," there is not a widespread groundswell of support for higher interest rates.
It appears that the Federal Reserve will be able to end the quantitative easing securities purchase program, without doing serious harm to the bond market. That alone has confounded many bond bears. Actually raising the short-term rates that the Federal Reserve controls, will be another matter. I doubt that Janet Yellen wants to stand in front of Congressional committees and be faced with the question: So you are telling us Dr. Yellen is now pursuing a policy with regard to interest rates whose stated purpose is to prevent more people having jobs and/or higher wages? Unless inflation was clearly a severe problem at the time, that question would be coming from both Democrats and Republicans.
Presently, the only complaints about low interest rates Janet Yellen gets in Congressional committee hearings come from a few Republicans ostensibly standing up for small savers and those who think that we are still on a fiat money system, rather than a credit money system, and thus think that the increase on the old fiat money aggregates will result in high inflation. See: Federal Reserve Actually Propping up Interest Rates: What this means for mREITs. She can handle those easily, and has not my knowledge confronted them with the question: "Just how much higher interest rates do you want your constituents to pay for their mortgages, car loans and credit cards, Congressman?" If the Federal Reserve was actually raising short-term rates, she might have a much tougher time in such hearings.
I think we are moving into an environment where it becomes less important what the market consensus thinks interest rates will do, rather than what the consensus thinks the Federal Reserve should do with regard to interest rates. This could be a paradigm shift. My net take on this is that the return on mREITs may be higher over the next few years than many expect, as the dividends remain stable while prices of mREITs actually rise. This could occur as the double-digit yields become irresistible to more investors. Cypress Sharpridge Investments (NYSE:CYS) is an example of a well-run mREIT paying a steady $0.32 quarterly dividend priced at $9 yielding 14.5%. Even with no growth in the dividend rate, I could see an improvement in the price which would still result in a generous double-digit yield. Leveraged mREIT instruments, such as MORL, would do even better in such an environment.
The MORL dividend for the month of August 2014 of $0.0802 is a 10.8% increase from the May 2014 dividend of $0.0724. For the three months ending August 2014, the total dividends are $1.1135. That is a 1.01% increase over the three months ending May 2014, which had dividends totaling $1.1024.
The $0.0802 August 2014 MORL dividend means that the annualized dividends based on the most recent three-months ending in August 2014 was $4.454. This is a 20.8% simple annualized yield with MORL priced at $21.40. On a monthly compounded basis, the effective annualized yield is 22.9%.
If someone thought that over the next five years interest rates would remain relatively stable and thus MORL would continue to yield 22.9% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $280,592 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $22,900 initial annual rate to $64,256 annually.
Disclosure: The author is long MORL, CYS, ARR, RAS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.