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MORL May Dividend Brings Yield To 22.3%

|About: UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL), Includes: AGNC, DX, NLY
Summary

ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL) declared a monthly dividend for May of $0.0724.

The key to maintaining the high yield for MORL is the continuation of extremely low levels of short-term interest rates.

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

ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) declared a monthly dividend for May of $0.0724. This is $0.0045 higher than my projection of $.0679 in: MORL Is Projected To Pay A Monthly Dividend In May Of $0.0679 Bringing The Yield To 22.2% The May dividend of $0.0724 is an increase 16.8% from the February 2014 dividend of $0.062 which is the most useful comparison.

The increase from the February 2014 dividend of $0.062 is primarily due to Dynex Capital Inc (NYSE:DX) which went ex-dividend on April 2, 2014 for $0.25. That was a decline from the $0.27 previous dividend paid by DX. However, the previous ex-dividend for DX was December 27, 2013. Thus, DX was not included in the February 2014 dividend of $0.062.

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 reason for the higher May dividend, relative to my projection appears to be primarily the result of my treatment of the interest and tracking fee expenses. They did not reduce the dividend in the manner I included in my calculations. Also, there was a slight improvement in the indicative value which does impact on the level of dividends.

As I indicated in:MORL's Net Asset Value Rises - Implications For The Dividends, an increase in the net asset value results in a commensurate increase in the dividend as the leverage is rebalanced.

The key to maintaining the high yield for MORL and the mREITs that comprise the index upon which it is based in the future, is the continuation of extremely low levels of short-term interest rates. The dividends paid by MORL are close to double what they would be if there MORL used no leverage, or if long and short term rates were equal. If the yield curve were flat, there would be no boost to dividend from the leverage. Furthermore, the dividends paid by major components of MORL such as Annaly Capital Management, Inc (NYSE:NLY) and American Capital Agency Corp.(NASDAQ:AGNC) are themselves highly dependent on a relatively steep yield curve and would be much less in a flat yield curve environment..

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.

The $0.0724 May 2014 MORL dividend results in a total of the dividends for the most recent three months of $1.1024; this is a 20.3% simple annualized yield with MORL priced at $21.76. On a monthly compounded basis, the effective annualized yield is 22.3%.

If someone thought that over the next five years, interest rates would remain relatively stable and thus MORL would continue to yield 22.3% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $273,130 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $22,300 initial annual rate to $59,542 annually.

Disclosure: I am long MORL, AGNC. 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.