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How to Get a 20% Dividend Yield with Monthly Payments

If you are an income investor seeking high yield with monthly income, then MORL may be a nice addition to your portfolio. I have invested in mortgage REITs like Annaly Capital, AGNC and others in the past to boost my income stock portion of my portfolio. With MORL, you get a basket of mortgage REITs with a 20% dividend yield with monthly income!

The UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL) has a trailing 12-month dividend yield of 20.6% as of this week’s close. Since dividend yields are crucial to some market participants, investors may be highly attracted to the exchange-traded note (ETN). Although MORL consistently offers high dividend yields in double digits and sometimes above 20%, there is one primary reason that it is able to offer captivating dividend payouts (currently, $2.99).

Nomura has started coverage of 10 US Mortgage REITs, with seven stocks assigned an initial investment rating of buy. “The environment for levered mortgage-based operating models is the best it’s been since the Taper Tantrum,” Nomura said in a note to clients, with the industry attracting “yield-starved investors amid a low, range-bound interest rate environment and expected yield curve steepening.” Nomura expects companies in the space to record better net interest spreads and “incrementally higher leverage.” It gave Annaly Capital Management Inc.(largest MORL holding

) a 2019 earnings-per-share estimate of $1.30 and a price target of $11. Annaly recently closed at $9.99.

MORL was issued on Oct. 16, 2012, and is legally structured as an uncollateralized debt instrument. Therefore, the ETN carries credit risk, which relies on the credit worthiness of UBS, and any of the payments made on MORL depend on the ability of UBS to satisfy its debt obligations. The ETN has an annual net expense ratio of 0.40%, which is over 50% below the average of its category of trading leveraged equity.

MORL seeks to provide investment results corresponding to two times the monthly performance of the MVIS Global Mortgage REITs Index, its underlying index. It was the first product of its kind to offer two times leverage in the mortgage REIT industry. Since the ETN is a monthly leveraged product, MORL aims to provide twice the monthly price and yield performance of its underlying index.

The mortgage REIT industry is known for its high dividend payout ratio and deriving its earnings by purchasing mortgage-backed securities (MBS) or lending money to individuals purchasing real estate. Mortgage REIT companies are able to borrow at a lower rate, close to the target federal funds rate, and they should invest the money in MBS or lend it to consumers. Consequently, the increased borrowing allows mortgage REIT companies to generate higher earnings and pay out attractive dividends.

The ETN pays out dividends to its holders on a monthly basis, which also attributes to its high dividend yields. However, the dividend is bigger in the final month of each quarter, which ends in January, April, July and October; during the two months in between the large quarterly dividend payments, it pays a smaller dividend.

The ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN due October 16, 2042 (the “Securities”) is a series of Monthly Pay 2xLeveraged ETRACS linked to the MVIS US Mortgage REITs Index (the “Index”). The Index tracks the overall performance of publicly-traded mortgage REITs that are listed and incorporated in the United States and derive at least 50% of their revenues from mortgage-related activities. The Securities are senior unsecured debt securities issued by UBS AG (UBS). The Securities provide a monthly compounded two times leveraged long exposure to the performance of the Index, reduced by the Accrued Fees. Because the Securities are two times leveraged with respect to the Index, the Securities may benefit from two times any positive, but will be exposed to two times any negative, monthly compounded performance of the Index. The Securities may pay a monthly coupon during their term linked to two times the cash distributions, if any, on the Index Constituent Securities. You will receive a cash payment at maturity, upon acceleration or upon exercise by UBS of its Call Right based on the monthly compounded leveraged performance of the Index less the Accrued Fees, calculated as described in the accompanying product supplement. You will receive a cash payment upon early redemption based on the monthly compounded leveraged performance of the Index less the Accrued Fees and the Redemption Fee, calculated as described in the accompanying product supplement. In addition, for any Securities it sells, UBS Securities LLC may charge purchasers a creation fee, which may vary over time at UBS’s discretion. If the creation fee is applicable, the return on your investment in the Securities will be reduced by the creation fee. Payment at maturity or call, upon acceleration or upon early redemption will be subject to the creditworthiness of UBS. In addition, the actual and perceived creditworthiness of UBS will affect the market value, if any, of the Securities prior to maturity, call, acceleration or early redemption.

The MVIS US Mortgage REITs Index is a modified capitalization-weighted, float-adjusted index designed to give investors a means of tracking the overall performance of publicly-traded mortgage REITs that are listed and incorporated in the United States and derive at least 50% of their revenues from mortgage-related activity. This includes companies or trusts that are primarily engaged in the purchase or service of commercial or residential mortgage loans or mortgage-related securities, which may include mortgage-backed securities issued by private issuers and those issued or guaranteed by U.S. Government agencies, instrumentalities or sponsored entities.

The Index is a price return index (i.e., the reinvestment of dividends is not reflected in the value of the Index). As of September 13, 2017, the Index was comprised of 25 Index Constituent Securities, with the largest Index Constituent Security weighted at 14.22% and the smallest Index Constituent Security weighted at 1.22%. The top ten constituent stocks of the Index as of September 13, 2017, by weighting, are listed in the table below:

 

Company Ticker Listing Country Index Weighting
Annaly Capital Management Inc. NLY US 14.22%
AGNC Investment Corp. AGNC US 8.58%
Starwood Property Trust Inc. STWD US 6.58%
New Residential Investment Corp. NRZ US 5.97%
Chimera Investment Corp. CIM US 5.06%
Blackstone Mortgage Trust Inc. BXMT US 4.95%
Two Harbors Investment Corp. TWO US 4.91%
MFA Financial Inc. MFA US 4.68%
Invesco Mortgage Capital Inc. IVR US 4.60%
Apollo Commercial Real Estate Finance, Inc. ARI US 4.34%
TOTAL 63.89%

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Mortgage REITs are Still an Attractive High Yield Dividend Play

Mortgage REITs have garnered increased attention among investors in recent weeks after the Federal Reserve announced stimulus measures focused on the purchases of mortgage backed securities.  The Market Vectors Mortgage REIT Income ETF (MORT), which seeks to replicate the price and yield performance of the Market Vectors Global Mortgage REITs Index, has gained over 20 percent year-to-date.

Mortgage REITs (mREITs) continue to be that right place for high yield investors.  The mortgage REITs are currently at a 4% premium to estimated third quarter book value and yielding 12.0%.  One of the biggest risks to mREITs is increasing mortgage prepayments as the reinvestment risk is higher when interest rate spreads decline.  The latest data suggests that mortgage prepayment rates showed a slowdown in the level of activity in September.

However, we expect increases in speeds in upcoming months given the rally in rates.  We continue to favor the mortgage REITs with prepay protected portfolios as they will have better third quarter book value performance from increased pay-ups on specified pools and more stable cash flows from lower reinvestment needs.  Prepayment speeds on 30-year conventional speeds decreased 11% in September from the prior month. Trends were generally consistent between the 30-year and 15-year sectors.

The best mortgage REIT plays are IVR, MTGE, and ATMG in the next quarter.

American Capital Mortgage Investment Corp. (MTGE) reported net income for the three months ended June 30, 2012 of $32.2 million, or $1.15 per share, and net book value of $22.08 per share.  The Company has a current price to estimated 3Qbook value of 106% indicating it is trading at a 6% premium.  However, American Capital has a dividend yield of 14.72% that has been increased 165% in the last year.

Coverage on American Capital Mortgage was initiated with an Outperform at JMP Securities. The stock price target is $26.50.

Invesco Mortgage Capital Inc. (IVR) reported net income of $79.8 million, or $0.68 per share (basic and diluted), for the quarter ended June 30, 2012 and its book value per share was $18.40.   The Company has a current price to estimated 3Qbook value of 105% indicating it is trading at a 5% premium.  Invesco Mortgage has a dividend yield of 12.54%.

Morgan Stanley recently upgraded Invesco Mortgage from EQUAL-WEIGHT to OVERWEIGHT.  The stock price target is $22.00.

Apollo Residential Mortgage, Inc. (AMTG) reported Net income was $26.4 million or $1.24 per share, for the three months ended June 30, 2012 and its book value per share was $19.65.   The Company has a current price to estimated 3Qbook value of 104% indicating it is trading at a 4% premium.  Apollo Residential has a dividend yield of 16.02%.

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