MORL's Yield Climbs To 23.2% As A Result Of The Highest Monthly Dividend In More Than 2 Years

Performance of MORL and Dividend Projection

For the one-year period ending December 22, 2017, UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL) returned 35.7% based on a purchase on December 22, 2016, at the closing price of $15.55, the December 22, 2017 price of $17.49 and the reinvestment of dividends through to December 2017. It does not include my projected January 2018 monthly dividend of $0.7813. It might be noted that the 35.7% total return on MORL was considerably more than the 21.0% total return on the S&P 500 (NYSEARCA:SPY) over that same period.

My projected January 2018 monthly dividend of $0.7813 would be the largest monthly dividend in more than two years. Not since the July 2015 monthly dividend of $0.7853 has MORL paid a higher monthly dividend. The calendar impacts the monthly dividends. Most of the MORL components pay dividends quarterly, typically with ex-dates in the last month of the quarter and payment dates in the first month of the next quarter. The January, April, October, and July “big month” MORL dividends are much larger than the “small month” dividends paid in the other months, since very few of the quarterly payers have ex-dividend dates in that contribute to the dividends in the “small months”. Thus, the $0.7813 MORL dividend paid in January 2018 will be a “large month” dividend. However, even just comparing January 2018 relative to the two prior Januarys, MORL’s dividend shows improvement. In January 2017 the MORL dividend was $0.7375. In January 2015 the MORL dividend was $0.7196. While typically called dividends, the monthly payments from MORL are technically distributions of interest payments on the ETN note based on the dividends paid by the underlying mREITs, pursuant to the terms of the indenture.

Only three of the MORL components – American Capital Agency Corp. (AGNC), Orchid Island Capital Inc (ORC), and ARMOUR Residential REIT, Inc. (NYSE:ARR) now pay dividends monthly. The composition of the index of mREITs upon which MORL is based is such that all of the quarterly dividend payers had ex-dates in December 2017. Thus, all of the monthly and quarterly payers will contribute to the January 2018 monthly dividend. Only iStar Inc. (STAR), which does not currently pay any dividends, will not contribute to the January 2018 monthly dividend. Having all components except STAR contributing to the monthly dividend was also the case for the January 2017 dividend. However, in December 2015 there was one quarterly paying component, RAIT Financial Trust (RAS), that did not contribute to the January 2016 dividend, since it had a January 2016 ex-date. It might be noted that in December 2015 RAS was the component with the smallest weight in the index, with a weight of only 0.81%. RAS is no longer in the index.

My projection for the January 2018 dividend for MORL and its essentially identical twin UBS ETRACS Monthly Pay 2X Leveraged Mortgage REIT ETN Series B (MRRL) of $0.7813 is calculated using the contribution by component method. Market Vectors Mortgage REIT Income ETF (MORT) is a fund that is based on the same index as MORL and MRRL. MORT pays dividends quarterly rather than monthly. As a fund, the dividend is discretionary by the fund management as long as it distributes the required percentage of taxable income to maintain its investment company status. Thus, it does not lend itself to dividend projections as an ETN like MORL, which must pay dividends pursuant to an indenture. The table below shows the ticker, name, weight, price, dividend, contribution to the dividend and ex-date for the MORL components.

Five-year Review

I have owned MORL for a little more than five years. In my articles about MORL, I have included a statement to the effect that:

Aside from the fact that with a yield 23.2%, you get back your initial investment in less than five years and still have your original investment shares intact, if someone thought that over the next five years, interest rates would remain relatively stable, and thus, MORL would continue to yield 23.2% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $283,377 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $23,200 initial annual rate to $65,633 annually.

The numbers above are from this article, but previously, similar calculations were done using whatever the annualized compounded yield was at that time. Those five-year computations in my earlier articles have been the subject of numerous skeptical comments.

I did not precisely reinvest all MORL dividends, but have consistently added to my MORL position in various accounts using the dividends and some additional funds. I have paid prices for MORL as high as $32.07 and as low as $9.94. As the five-year anniversary of my initial MORL purchase has past and there are now actual five-year holding periods for MORL that can be examined, it may be interesting to see what the historic $100,000 five-year holding period return would be.

A hypothetical investment of $100,000 in MORL on December 24, 2012, at the closing price of $24.69, assuming reinvestment of all dividends, would be worth as of the December 22, 2017 price of $17.49, $205,211.10. It might be noted that a hypothetical investment of $100,000 in SPY would have grown during the same period to $207,787.70, again assuming reinvestment of all dividends.

Outlook For MORL and Reasons For Caution

In REM And The mREITs Outperform, But Risks Are Lurking, I discussed the extent that the mREITs have significantly outperformed the mortgage-backed securities that comprise much of the securities held by the mREITs. By definition, the basic reason for the outperformance of the mREITs relative to the securities in their portfolio has been the increase in the market price to book value that many of the mREITs have been trading at.

A Seeking Alpha article by Colorado Wealth Management Fund Quick And Dirty mREIT Discounts For December 18, 2017 indicates that for 25 mREITs, most but not all, held by MORL, the average market-to-book value was 97.37%. As the title of the above-mentioned article suggests, mREITs have generally been trading at discounts in the last few years. On 12/31/2015, the mREITs followed in the article traded at 78.19% of book value. This was a substantial 21.81% discount. The discounts narrowed until turning into premiums as shown by the 101.35% market-to-book value of April 27, 2017. From there, the market-to-book value fell to 96.22% on May 9, 2017. The sharp approximately 5% drop in the market to book value, which over that short period was essentially also a 5% decline market price, illustrates that buying mREITs or portfolios of mREITs such as MORL can be problematic when mREITs are trading at premiums to book value.

While the December 18, 2017, value of 97.37% is down from the September 30th, 2017, value of 100.57%, the average market to book value is much closer to the peak than it has been for most of the past few years. Thus, signaling caution. Additionally, when mREITs are trading at premiums to book value, issuance of new shares usually follows. Indeed some mREITs such as ARR and Annaly Capital Management Inc. (NYSE:NLY) announced sales of additional shares near the peak in market-to-book value.

While there are some factors other than interest rates that determine the outlook for MORL and the mREITs, interest rates are by far the most important factor. It could be said that the movement in the market price-to-book values for the mREITs are primarily a function of market participants’ expectation of the future path of interest rates. In theory, only the present level of market interest rates should influence the market prices of mREITs. This is because an mREIT in theory should not trade at prices significantly different than the book value because of the possibility of arbitrage.

Interest Rates are the Key to Future MORL Performance and the Tax Law Changes Will be a Factor

By far, the biggest risk for MORL and the mREITs is a sharp increase in interest rates. MORL and the mREITs can be considered to be somewhat like high-grade fixed income securities in terms of their returns relative to interest rates. However, mREITs can also be seen as businesses that generate income from the spread between long-term rates on mortgage-backed securities and the short-term rates at which they borrow to finance their holdings of mortgage-backed securities. Now that the tax bill has be enacted, we can have a better idea of the likely impact on various economic variables from the bill.

The recently enacted tax-bill does benefit mREITs in that they are now considered pass-through entities for tax purposes and holders of mREITs can pay lower taxes as a result. Dividends paid by ETNs such as MORL are interest for tax purposes and thus are not impacted by the tax bill. However, if the values of the underlying mREITs increases, the value of MORL will increase commensurately. This beneficial tax-related effect for mREITs is likely to be minor.

The tax bill will have an impact on the business cycle. The two major macroeconomic impacts will be: from a form of classic Keynesian deficit stimulus and the further widening of inequality. Prior to enactment of the bill, the top 1% paid about 39% of Federal taxes. If a tax bill that provided that 39% of the benefits went to the top 1%, were enacted, there would have been very little impact on the degree of inequality. However, the actual tax bill provides that 83% of the benefits will go to the top 1%. While only 17% will go to the rest of the 99%.

Conventional analysis of the impact of tax legislation on inequality makes a profound error. Many use the terms pretax inequality and after-tax inequality. This terminology misses the causal relationship. A hundred years ago, looking at pretax inequality and then estimating how much the tax code impacts inequality might have been logical. That assumes there are some significant nontax factors that are causing inequality and tax law can then increase or decrease the degree of inequality. There is at any given point in time a degree of pretax inequality. However, almost all of the variability of pretax inequality since at least World War I has been the cumulative effect of tax and other legislation.

Prior to enactment of the Federal income tax in 1913, all inequality was due essentially to nontax factors. The first Federal income tax in 1913 reduced inequality, since it was a tax of 7% of income above $500,000. At that time $3 a day was considered a good wage. Thus, originally only a minute fraction of the richest 1% paid all of the Federal income tax in 1913. At that time it was accurate to say that there were significant nontax causes of inequality. Changes in tax and social welfare laws after then would either increase or decrease inequality.

Obviously, wealth inequality, which is a function of cumulative prior income inequality, does cause income inequality. However, other than wealth inequality, there have not been any significant nontax causes of income inequality for at least the last 50 years.

As I explained in “A Depression With Benefits: The Macro Case For mREITs”:

.. Issues such a globalization, free trade, unionization, minimum wage laws, single parents, problems with our education system and infrastructure can increase the income and wealth inequality. However, these are extremely minor when compared to the shift of the tax burden from the rich to the middle class. It is the compounding year after year of the effect of the shift away from taxes on capital income such as profits, dividends, capital gains and inheritances over time as the rich get proverbially richer which is the prime generator of inequality…

The primary change that has fundamentally changed the economy can be best described by Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), who said, “Through the tax code, there has been class warfare waged, and my class has won,” to Business Wire CEO Cathy Baron Tamraz at a luncheon in honor of the company’s 50th anniversary. “It’s been a rout.”..

For at least 50 years, non-wealth and nontax factors had very little impact on pretax inequality. All of the factors that previously had some effect on pretax inequality, now merely take income from one group and may transfer it to others but do not impact pretax inequality. Increasing or decreasing the power of labor unions may have impacted pretax inequality in the past. However, the relative power or lack of power today of unions may determine whether higher paid unionized employees gain or lose relative to lower paid non-union workers and consumers, but that does not significantly impact inequality between the top 1% and the other 99%. Increasing the minimum wage would in many cases be just transfer money from those who eat at McDonald’s to those who work at McDonald’s and similar establishments.

Technological progress, globalization and free trade on balance makes almost all people better off. There will be some losers at times. However, any harm from technological progress, globalization and free trade is a likely to impact the owners of firms as much as employees of those firms. Thus, there is no impact on inequality. At one time lack of access to education may have significantly contributed pretax inequality. That is not the case today. The unpleasant truth is that today’s white non-college educated working class person is not your grandfather’s white non-college educated working class person.

Eighty years ago, there were many very intelligent people who did not attend college because of financial circumstances or because of discrimination against their race, religion or gender. Henry George, arguably the most brilliant American economist of the 19th century, left school at age 14. President Harry Truman was not a college graduate.

Today, with many exceptions, someone under the age of forty who was never interested in college probably is not very smart. That could reduce their wages. That also makes them vulnerable to the lies that got Trump elected. Even some with college educations are not able to understand that NAFTA and trade agreements in general increase employment and standards of living and that immigrants are not responsible for slow economic growth. However, lack of access to education, trade agreements and immigration are not the reasons why smarter people can generally earn more than others.

Ironically, if any Republican had been elected president, the shift in the tax burden from the rich to the middle class that Warren Buffett describes as having been “a rout” would have become the outright massacre that the new tax bill represents. This will not be great for the Congressional Republicans politically. Their prospects would be much better if no tax bill had been passed, and then they could run on the issue of “elect us and we will enact a middle class tax cut”. Many Congressional Republicans are probably aware that massively shifting the tax burden from the rich to the middle class is not necessarily a political winner. However, they want to pass legislation that does exactly that with the knowledge that as long as Trump is president, there is no way that their tax legislation can be repealed, even if Republicans lose control of Congress. Furthermore, as Obamacare and the Bush tax cuts have demonstrated, it is very difficult to change existing laws once they are passed. This is true even if the other party gains control of both Congress and the presidency.

While Trump would have no hesitancy in stating something to the effect that: “The middle class got a giant tax cut and the rich did not, don’t believe anyone who is telling you otherwise, especially the fake mainstream media, your accountant or H&R Block (HRB)”, other Republicans may be reticent to take that approach.

The political debate may now shift from how many middle class taxpayers actually will pay more or less under the Republican tax bill to the undeniable fact that there will be a massive shift in the tax burden from the rich and onto the middle class. The majority of middle-class taxpayers will see some benefit from the tax bill. However, even they might ponder the question of how much more they would have gotten from a tax bill that provided that 39% of the benefits went to the top 1%, and thus 61% of the benefits went to the other 99% as opposed to the 83% going to the top 1%.

The fact that the non-rich could have had greater tax cuts, if the rich had not gotten so much, is not the only political problem for the Republicans. The tax portion of the Obama stimulus program lowered taxes on everyone who paid social security taxes and gave some extra payments to those on social security and unemployment compensation. However, most people falsely believed their taxes had been increased. With the new tax bill, there will be many middle class losers, which was not the case in earlier tax cuts.

An old adage is that a family should buy the absolutely most house they can. Prior to 2007, buying more house than they could comfortably afford was a generally winning strategy as home prices usually rose. Even today there are many middle class households following the “absolutely most house they can” strategy, who are just barely able to afford their homes. A family in the New York City suburbs with an income of $150,000 may be just able to pay their bills only because they can deduct the $10,000 they pay in state and local income tax and the $30,000 they pay in real estate taxes from their federal income tax bill. Limiting the state and local deduction to $10,000 will mean that many in those circumstances will lose their homes.

In: CEFL has a 15.9% yield on annualized monthly compounded basis. I said a few weeks ago:

There are many different ways to categorize households as between those that are middle class and those that are rich. Likewise, there are a number of ways to measure how a change in the tax code impacts various sectors in the economy. There are also different methodologies used to calculated what percentage of Federal taxes are paid by middle class households as compared to the rich However, by any conceivable way of delineating the middle class from the rich, and measuring the impact of changes in the tax code, the tax bill enacted this year will be the most massive shift in the tax burden away from the rich and thus onto the middle class.

We have seen this story before. It is not just a coincidence that tax cuts for the rich have preceded both the 1929 depression and the 2007 financial crisis. The Revenue acts of 1926 and 1928 worked exactly as the Republican Congresses that pushed them through promised. The dramatic reductions in taxes on the upper income brackets and estates of the wealthy did indeed result in increases in savings and investment. However, overinvestment (by 1929 there were over 600 automobile manufacturing companies in America) caused the depression that made the rich, and most everyone else, ultimately much poorer.

The quandary for investors can be described as someone who has seen the first and last page of a book, but does not know either how long the book is or what happened between the first and last pages. We know that a massive transfer to the rich will happen. We know that the middle class has a much higher marginal propensity to consume than the rich. We know that initially the rich, or if you rather the job creators, use their additional after-tax income to invest. This extra investment initially boosts securities prices. The higher prices securities for securities enables investments to occur, that might have otherwise been undertaken. These can range from factories, shopping centers and housing. What we don’t know is the path that equity prices and interest rates will take between the enactment of the tax shift and the eventual financial crisis or other event occurs, at which time the massive excess of supply of loanable funds as compared to demand for loans will push risk-free short-term interest rates down to near the lower bound, as was the case during the 1930s, in Japan for decades and in America since 2008.

The length, path and magnitude of a tax-shift induced cycle is particularly important to investors in leveraged instruments, such as high yield 2X leveraged ETNs. No two overinvestment cycles are identical. This time the picture is cloudier since most of the shift in the tax burden from the wealthy to the middle class will be via reductions in business taxes. However, that does not mean that changing corporate taxes other than the rate cannot impact economic activity. Reducing taxes on corporations would not increase economic activity since a profit maximizing corporation will make decisions that relating to the level of production, wages and prices that maximize after-tax profit. Since corporate income taxes are a percent of pre-tax profits, the level of output, wages and prices that maximize pre-tax profits are also the same levels that maximize after-tax profits. This was explained in: Get 16.8% Dividend Yield, And Diversify Some ETN Interest Risk.

Allowing immediate expensing of capital expenditures or even just allowing vastly increased accelerated depreciation could bring forward capital expenditures that would have otherwise have taken place in the future. This can be particularly powerful as the immediate expensing or extra accelerated depreciation was set to only last for a specified period. Allowing immediate expensing of capital expenditures could even cause projects that would otherwise be not accepted on a net-present value analysis be undertaken as a result of now having expected internal rates of return exceeding the hurdle rate.

There is also a “geographical Laffer Curve effect” when different taxing jurisdictions cause activity to shift from higher tax jurisdictions to those with lower taxes. Generally, this is more pronounced the closer the different jurisdictions are. People driving from New York to New Jersey to pay less sales taxes when they shop are an example. Lower corporate taxes in the U.S. could shift some activity from other countries. Although, other countries could in turn lower their corporate tax rates, in return. Allowing repatriation of corporate profits now nominally held in other countries or just eliminating taxes on foreign earnings could boost the value of shares in multinational corporations. These would include Apple (AAPL) and possibly even General Motors (GM). Most major profitable multinationals have ample access to capital regardless of where their cash is located. Thus, very few multinational corporations are not undertaking any projects because of where their cash is located.

This time we may have a much shorter overinvestment period and go almost directly to the financial crisis period. This could occur if disruptions to specific sectors precipitate a financial crisis. Eliminating the Obamacare individual mandate will cause there to be 13 million less people with health insurance. Uninsured people spend less on health care than those with insurance. Most studies indicate a 25% difference. Thus, fewer insured people will result in less spending on health care than would have been the case otherwise. Other than the direct impact on GDP from lower expenditures, there could be financial distress as some firms in the health care become unable to pay their debts.

There is now a significant possibility that disruptions to specific sectors in the economy could be more important than the pure macroeconomic impacts of the Republican tax bill. The risks of defaults stemming from weakness in the housing-related sectors exceeds that of healthcare. The homebuilders are correct in their complaints that most of the tax advantages of home ownership will be eliminated by the Republican tax bill. As the homebuilders point out, many more middle and low-income people will no longer itemize since the standard deduction has increased and other deductions will be reduced or eliminated. Additionally, a lower limit on mortgage interest deduction for new home purchases reduces tax advantages of home ownership.

Thus, as the home-builders now argue, only a few relatively wealthy households that still itemize will get any benefit from the $10,000 deduction. For those wealthy households, a $10,000 deduction is not likely to be a major factor when deciding whether to buy a home. The net result could be a significant negative impact on home prices.

As I said in: With A 23.4% Dividend Yield Credit Suisse X-Links Monthly Pay 2xLeveraged Mortgage REIT ETN REML Now More Attractive

Another potential disruption from the Republican tax bill also stems from the reduction or eliminations of deductions for state and local taxes. As with the real estate impact, the impacts on the finances state and local will vary widely for different regions and locations. There are some jurisdictions that will be severely impacted the reduction or eliminations of deductions for state and local taxes. New York and California are the obvious examples.

Disruption caused by the Republican tax bill could result in various degrees of financial distress and defaults that could cause the Federal Reserve set short-term interest rates lower that what markets are now assuming. This would be a very good development for holders of agency mortgage-backed securities. Leveraged mREITs would benefit significantly. Long-term fixed income securities could also benefit from lower issuance of corporate bonds. Lower corporate income taxes reduce the tax benefits from debt and could give corporations additional funds to pay down debt.

Conclusions and Recommendations

With this much uncertainty regarding the future direction of both the fixed income and equity markets, what is an investor to do? If you are reading this, you probably are an investor in, or at least a potential investor in 2X Leveraged ETNs such as: MORL, MRRL, UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA:CEFL) and UBS ETRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (NYSEARCA:BDCL). In my article “BDCL: The Third Leg Of The High-Yielding Leveraged ETN Stool“, I said that BDCL is highly correlated to the overall market but may be a very good diversifier for investors seeking high income who are now heavily invested in interest rate sensitive instruments. Previously, I pointed out in 17.8%-Yielding CEFL – Diversification On Top Of Diversification, Or Fees On Top Of Fees? those investors who have significant portions of their portfolios in mREITs and in particular a leveraged basket of mREITs such as the ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN could benefit from diversifying into an instrument that was highly correlated to SPY.

That the mREITs are trading at elevated levels relative to book value and in some cases close to multi-year highs is certainly cause for caution. MORL has come down in price from the October 5, 2017 closing high of $19.16. Active traders might want to take advantage of this price reduction or conversely consider waiting until further price declines, possibly if deeper mREIT discounts return or fears of higher interest rates increase. In the past, mREITs trading at or close to premiums to book value have resulted in new issuance of mREIT shares which tended to push down mREIT prices. There is no reason to think that will not be the case now. The other lesson we can learn from the last few years is that waiting for price declines in high-yielding instruments like MORL can backfire as the large dividends forgone by waiting exceed the savings from a lower purchase price.

Taking all of this into consideration, I am still a cautious buyer of MORL and MRRL and have added during the recent dip. Sometimes, one of those can be bought slightly lower than the other one. The yields are still compelling. However, the uncertainty regarding tax policy and means that significant event risks exist in addition to the risks inherent with the ETNs’ use of leverage. This is in addition to the leverage employed by many of the components that make up the indices upon which these ETNs are based. I am diversifying with CEFL and BDCL since there is a small possibility of much stronger economic growth than I expect. If a major increase in protectionism is enacted or something equally catastrophic were to occur, it would be expected that the stock market would decline sharply, but MORL could do better as investors seek the safety of agency mortgage-backed securities and the Federal Reserve lowers interest rates.

Another addition to my 2X high yield leveraged ETN portfolio is REML, an exchange traded note that is based on the FTSE NAREIT All Mortgage Capped Index of mREITs. That is the same index used by the iShares Mortgage Real Estate Capped ETF. REML is followed much less than MORL. The volume and liquidity of REML is in the category of what some would derisively refer to as a “trades by appointment” security. There are reasons that one might consider REML rather than MORL or vice versa. As I discussed in: How Does REM Pay That 15% Dividend? the index upon which REM and thus REML is based contains more mREITs than the index upon which MORL and MRRL is based. As I explained in the article 30% Yielding MORL, MORT And The mREITs: A Real World Application And Test Of Modern Portfolio Theory, diversification can allow for higher expected returns without commensurate increases in risk. Just adding REML to a portfolio that previously only held MORL would make it slightly more efficient. A security or a portfolio of securities is more efficient than another asset if it has a higher expected return than the other asset but no more risk, or has the same expected return but less risk.

Even though MORL and REML include mostly similar securities, their portfolios are not identical. REML has more component mREITs than MORL. Additional diversification considerations are that MORL is an obligation of UBS while REML is an obligation of CS. It is highly unlikely that either UBS or CS will default in the foreseeable future. However, to the extent one has any concern over those major banks’ future solvency holding MORL and REML can provide diversification in that regard. Some have expressed concern regarding the call provisions in ETNs such as MORL. MORL can be redeemed at net indicative (asset) value by UBS if the value falls too low or too quickly. That is not really economic call risk. Since, unlike a call on a bond where the issuer has the right to buy back the bond at a specified price below the market value the bond would have without the call, the ability to redeem at net asset value has no intrinsic option value.

As I said in: With A 22.1% Dividend Yield, REML Is The Highest Of The ETNs, But New Risks Are Present

REML can be called or redeemed at net indicative (asset) value by CS at any time. This is also the case with almost all mutual funds where the sponsor can close the fund and return the net asset value to the shareholders. Normally, the only time a fund or an ETN would be closed if it was not economic to remain open. This could occur if it became too small. With leveraged ETNs, the sponsor would close it if the value of each share was so low that it posed a margin-type risk. This is the same reason a brokerage firm would liquidate a margin account if the equity relative to the amount borrowed by the account fell to low. In that respect, REML trading at a price close to double that of MORL has less of a prospect of being redeemed because the price per share falls too much. However, in terms of likely to be called because the entire size of the ETN is too low, there is a greater chance of early redemption with REML. In any case, early redemption is more of an annoyance than a risk. One can always use the proceeds from an early redemption to buy securities with similar risk/return profiles. With REML and MORL they would serve as good substitutes for each other in the event of an early redemption.

My calculation projects a January 2018 monthly dividend of $0.7813. The implied annualized dividends would be $3.675, based on annualizing the most recent three months including the January 2018 projection. This is a 21.0% simple annualized yield with MORL valued at $17.49. On a monthly compounded annualized basis, it is 23.2%.

Aside from the fact that with a yield 23.2% you get back your initial investment in less than five years and still have your original investment shares intact, if someone thought that over the next five years, interest rates would remain relatively stable, and thus MORL would continue to yield 23.2% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $283,377 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $23,200 initial annual rate to $65,633 annually.

Holdings of MORL and MRRL, Prices as of 12-22-2017









Annaly Capital Management Inc








American Capital Agency Corp








New Residential Investment Corp








Starwood Property Trust Inc








Blackstone Mortgage Trust Inc








Chimera Investment Corp








Invesco Mortgage Capital Inc








Apollo Commercial Real Estat








MFA Financial Inc








CYS Investments Inc








Two Harbors Investment Corp








Hannon Armstrong Sustainable Infrastructure Capital Inc








Pennymac Portgage Investment








ARMOUR Residential REIT Inc








Ladder Capital Corp








American Capital Mortgage Investment Corp








New York Mortgage Trust Inc








Redwood Trust Inc








Capstead Mortgage Corp








Anworth Mortgage Asset Corp








AG Mortgage Investment Trust Inc








Orchid Island Capital Inc








Western Asset Mortgage Capital Corp








iStar Inc






Dynex Capital Inc








Disclosure: I am/we are long MORL, MRRL, AGNC, RAS, BDCL. CEFL, REM, REML, ORC, CYS.

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.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Paul Rosen