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%|
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