Consumer Spending, Soy Exports Power Economic Growth Higher Than Thought


The Key to the Five-Year mREIT Outlook

Someone considering an investment in mREITs, and especially UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL), with a five-year horizon, should ask themselves "in the next five years, how many increases and decreases in the target interest rate will be made by the Federal Reserve?" Since the end of 2015 the Federal Reserve has increased the target Federal Funds interest rate seven times, each in increments of 25 basis points. The December 2015 increase in the target rate was the first change in the rate since the Federal Reserve finished lowering rates in 2008.


Most market participants focus on the questions of how many additional rate increases will the Federal Reserve make, what the timing of those increases will be and what the rate will be when the Federal Reserve is finished tightening? From the perspective of a potential investor with a five-year holding period, it may be more useful to consider whether there will be more increases than decreases in the target rate over the next five years. Both the projected number of increases and decreases and/or the cumulative magnitude of the increases relative to the decreases could be considered.

There are some things that almost everyone will agree upon, regardless of their outlook for the mREITs. Certainly, if it becomes clear that a recession is occurring, the Federal Reserve will start decreasing the target Federal Funds interest rate. The best time to own mREITs is when the Federal Reserve is lowering the target Federal Funds interest rate. Most economists agree that it's likely that a recession will occur within the next five years. We are now in the 12th post-WWII expansion. The current economic expansion which began in June 2009 already is the second longest in history. Only the 120 month expansion from March 1991 - March 2001 was longer. As of August 2018, the current expansion will be 111 months old. It will become the longest ever, it's still ongoing in July 2019.

It's likely that the question of the prospects of a recession in the next five years is more a question of when, rather than if. Unfortunately for economic forecasters, it appears that the range of probable economic outcomes is now diverging rather than converging. In most matters in history, the facts tend to converge over time rather than diverge. A poor analogy could be the assassination of President Kennedy in 1963. Initially, there was some confusion and questions as to exactly who was involved. However, with the passage of time it eventually became clear to most that Lee Harvey Oswald acted alone.

With the key question of when the next recession will occur, the factors that could affect that outcome seem to be diverging rather than converging. An example of outcomes diverging rather than converging is what the possible outcomes in the Russian involvement with 2016 election will be. As of this writing, just after a number of Russian intelligence officers and others have been indicted, it would be reasonable to say that if no indictments of any Americans for conspiracy against the United States of America occur, the matter will essentially fade into history with no real consequences for the American economy or politics. However, if Americans involved with the Trump campaign are indicted for conspiracy against the United States for their actions coordinating the Russian efforts to elect the president, and especially if Trump is named as an un-indicted conspirator, the consequences would likely be very significant. In my view we have no better idea of which of those outcomes is more likely than we did a year ago. There are other areas of divergence that could have a significant impact on the economic outlook that are discussed below. These include the risks associated with protectionism and foreign policy.

Five-Year Review

An analysis of the actual results for the last five years may be informative now. I have owned and written articles about MORL for 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 of 21.3%, 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 21.3% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $262,713 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $21,300 initial annual rate to $55,984 annually..."

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

A hypothetical investment of $100,000 in MORL on July18, 2013, at a price of $20.24 assuming reinvestment of all dividends, would be worth $222,292 as of July 17, 2018, when the closing price was $15.77, a holding period of five years. That's an annualized compound return of 17.39% per year. It might be noted that a hypothetical investment of $100,000 in the S&P 500 Index (NYSEARCA:SPY) would have grown during the same period to $183,430, again assuming reinvestment of all dividends. That's an annualized compound return of 12.90% per year. It should be noted that during this period there were seven increases in the Federal Reserve target interest rates, and no decreases in the rate. Had there been any decreases, or even none or fewer increases in the Federal Reserve target interest rates than actually occurred, the returns on MORL would certainly would have been higher over the past five years.

Outlook For MORL, Reasons to Buy and Reasons for Caution

Interest rates are the key determinant of both the dividends paid and the share prices of mREITs. For MORL interest rates are even more important because of the 2X leverage. The spread between the longer-term interest rates paid by the mortgage-backed securities held by the mREITs and the shorter-term rates they pay on the borrowing they do to finance their mortgage-backed securities generates the income that's used to pay their dividends. MORL adds another level of leverage and effectively borrows at an interest rate based on three-month LIBOR in order the increase the monthly distributions. There's essentially one reason to buy MORL, that is the current yield. The decision to buy or hold MORL depends on whether receiving the approximately 20% current yield outweighs the risks. The major risk involves interest rates. However, there are other related risks and reasons for caution.

For MORL and the mREITs the word "risk" could be thought of similar to as it's used in modern portfolio theory. As was discussed in 30% Yielding MORL, MORT And The mREITS: A Real World Application And Test Of Modern Portfolio Theory, risk in financial theory refers to uncertainty. That's similar to the Chinese symbol for the word risk, which combines the symbols for both danger and opportunity. This is in contrast to the way that the insurance industry and many participants in the financial markets use the word risk to mean the possibility of loss. Uncertainty suggests both upside and downside potential, or in terms of the Chinese symbol: danger and opportunity.

Many of the risks that now exist for the economy and financial markets have some elements of upside potential for MORL and the mREITs. Thus, these risks might be better viewed as uncertainties with regard to MORL and the mREITs. In particular, there are policy risks that have arisen as a result of the 2016 election. In a March 2017 article -Investing In The Era Of Trump - Do Bad Economic Outcomes Necessarily Mean Bad Investment Outcomes? - I discussed various potential risks that unfortunate policy choices by the Trump Administration could pose. Clearly, a policy choice that causes a recession can benefit MORL and the mREITs, if it causes the Federal Reserve to lower short-term interest rates.

In >Does The 21% Dividend Yield Compensate For MORL's Risks? I said:

Many, but not all, of the risks posed by unfortunate policy actions by the Trump Administration primarily threaten the equity markets. The relationship between the mREITs (and thus MORL) and the stock market is complicated. At times, sharp sell-offs in the equity markets can reduce market interest rates on securities that are considered credit risk free. The agency securities that comprise much of the portfolios of mREITs are considered credit risk free. Thus, sharp declines in the stock markets and/or the events that cause the sharp declines in the stock markets can trigger "flight to safety" rallies in the Treasury and agency mortgage-backed securities markets. Likewise, sharp declines in the stock markets and/or the events that cause the sharp declines in the stock markets can influence the Federal Reserve with regard to interest decisions. Sharp declines in the stock markets and/or the events that cause the sharp declines in the stock markets may cause the Federal Reserve to refrain from raising rates or even to lower rates.

Declines in the stock market are not always positive for mREITs. Stocks and fixed-income securities in a sense compete for shares of investors' portfolios. A decline in the equity market can cause some investors to rebalance their portfolios to shift out of fixed-income securities such as agency mortgage-backed securities into stocks. Additionally, mREITs can be considered businesses that borrow money to buy and hold mortgage-backed securities and then engage in various hedging strategies. Thus, a decline in the stock market can bring down the prices of mREITs along with most other securities listed on stock exchanges.

The above mentioned article describes in detail how many policy-related risks are combining and intertwining and thus posing multiple threats to investors. In the few weeks since that article was published uncertainties have increased and the range of possible outcomes have diverged. Trade issues are a prime example.

At any point in time President Trump could announce something to the effect that: All of his objectives have been attained with regard to trade issues, since all of our trading partners have agreed in principle with his goal of eliminating all tariffs and other trade restrictions. Thus, all of the tariffs his administration has imposed are now cancelled. That would make financial markets ecstatic, even if there was no change in any existing trade agreements. The truly committed protectionists like Peter Navarro, Bernie Sanders and Senator Sherrod Brown (D-Ohio) who are prime examples of the "progressivism of fools" branch of protectionists would not be pleased. The only objective of tariffs supported by those protectionists is to transfer wealth to the employees and owners of favored domestic producers. That the costs and losses to the rest of Americans far exceeded the gains to the employees and owners of favored domestic producers is never a concern of the "progressivism of fools" branch.

There's also a real possibility that Trump could escalate with an additional $200 billion in tariffs against China. His administration has already published the detailed list of items that would be subject to the additional $200 billion in tariffs against China. There's a mandatory comment period before such tariffs could be imposed. This could easily precipitate a recession or worse. There are a number of ways that China could retaliate.

One possible Chinese response would be to greatly expand soybean and corn production worldwide by providing subsidized credit and capital to areas such as South America and Africa that could be used for expanding soybean and corn production. During the colonial era there were many very large farms owned mostly by Europeans in sub-Sahara Africa. Today, risk/reward profit maximizing investors would tend to avoid investing in large capital-intensive agricultural operations that could be subject to expropriation or the whims of warlords, as was the ultimately case with many of the large farms that had been established during the colonial era.

China could easily decide, either for retaliatory or food security reasons, to have its state controlled or influenced entities to advance the funds needed to develop large efficient capital-intensive farms. There are many areas in the world in addition to South America and Africa that could be used for expanding soybean and corn production, if the money for modern irrigation and advanced farm equipment was made available on very favorable terms by the Chinese.

Were this to occur, American soybean and corn farmers and the areas that depend on them would be depressed for many years. Many point to the depression in American agriculture in the 1920s that preceded the great depression. Even before the new crops from these Chinese world-wide invests came online, the prospect of the gluts they would cause would depress prices of farmland and sales of farm equipment. This could result in defaults and credit problems that would prompt the Federal Reserve to lower interest rates.

China also could retaliate by imposing taxes or restrictions on America's largest "export" which is securities such as bonds. This also could hurt China as the value of their vast holdings of American securities might decline. However, the whole point of a trade war is to harm the other side even if it hurts you. The United States federal government is well on the way to its first $2 trillion deficit, as is described more fully in the article "A Reality Check On The Budget Outlook." Chinese retaliation such as taxing American debt securities, that makes it difficult to finance the American deficits, could harm the economy and securities markets.

The trade policy-related risks are particularly acute because of Trump's biggest falsehood, which is by far the most dangerous, because so many people who are vehemently opposed to Trump appear to have bought into it, is that the US has entered into terrible trade deals. The exact opposite is the truth. The US may not be No. 1 in everything, but we are definitely No. 1 in negotiators and lawyers.

If two foreign countries, say Brazil and Argentina, were in a trade-related dispute, both sides will hire American negotiators and lawyers. One tactic the US has used to get the upper hand in trade negotiations was to use American women to do the face-to-face negotiation. Many foreign cultures were unused to dealing with women at that level. This gave the US an additional advantage when negotiating the trade deals, that made America the world's largest and strongest economy.

Most distressing is that the leftist protectionists like Bernie Sanders were so quickly able to go from complaining that trade deals like NAFTA and the TPP were examples of corporate America exploiting the workers of the world, to agreeing with Trump's false assertion that the trade deals were one sided against American business interests.

The Economy: Expanding Growth or a Slowdown?

The new tax law, which certainly exacerbated the deficit and debt problems, is not as inflationary as compared to other fiscal policy that might have resulted in similar increases in deficits. Borrowing money in the Treasury market to fund tax cuts for the rich is not as inflationary as borrowing the same amount of money to fund additional social welfare spending.

Whatever one's opinion on the widening inequality that the tax bill will cause, it is certain that the first order effect of shifting the tax burden away from the rich and onto the middle class is an increase in the amount of funds available to purchase securities. This can offset some of the increased borrowing by the federal government

There is a general consensus that economic growth will be strong in the near term. The tax bill contains a number of provisions which will boost capital spending. This will accelerate economic activity. The question is how much this extra economic activity will be borrowed from the future? The immediate expensing for capital spending was made retroactive to 2017. This has clearly added to growth already. However, this could result in over-investment which can cause a recession or worse. At a minimum some of the expansion in plant and equipment spending occurring now may be the result of projects that would have taken place in the future, but now will not occur then and thus drag down economic activity. Both the immediate expensing for capital spending and the dramatic shift in the tax burden away from the rich and onto everyone else may set the stage for a recession based on over-investment. The repatriation of corporate money held overseas due to the new tax law also could compel capital spending to increase more than reasonable forecasts of future consumer demand would warrant.

Five years ago in July 2013, I laid out my economics-based rationale for investing in mREITs in A Depression With Benefits: The Macro Case For mREITs, which set forth the premise that overinvestment caused by tax policy is the primary driver of the business cycle and that the inequality resulting from the then existent tax code made me a buyer of MORL. That article included in part:

"..In free-market capitalism, capital generates income for the owners of the capital which in turn is used to create additional capital. This is very good. Sometimes, it can be actually too good. As capital continues to accumulate, its owners find it more and more difficult to deploy it efficiently. The business sector generally must interact with the household sector by selling goods and services or lending to them. When capital accumulates too rapidly, the productive capacity of the business sector can outpace the ability of the household sector to absorb the increasing production.

The capitalists, or if you prefer, job creators use their increasing wealth and income to reinvest, thus increasing the productive capacity of the business they own. They also lend their accumulated wealth to other business as well as other entities after they have exhausted opportunities within business they own. As they seek to deploy ever more capital, excess factories, housing and shopping centers are built and more and more dubious loans are made. This is overinvestment. As one banker described the events leading up to 2008 – First the banks lent all they could to those who could pay them back and then they started to lend to those could not pay them back. As cash poured into banks in ever increasing amounts, caution was thrown to the wind. For a while consumers can use credit to buy more goods and services than their incomes can sustain. Ultimately, the overinvestment results in a financial crisis that causes unemployment, reductions in factory utilization and bankruptcies, all of which reduce the value of investments.

If the economy was suffering from accumulated chronic underinvestment, shifting income from the non-rich to the rich would make sense. Underinvestment would mean there was a shortage of shopping centers, hotels, housing and factories were operating at 100% of capacity but still not able to produce as many cars and other goods as people needed. It might not seem fair, but the quickest way to build up capital is to take income away from the middle class who have a high propensity to consume and give to the rich who have a propensity to save (and invest). Except for periods in the 1950s and 1960s and possibly the 1990s when tax rates on the rich just happened to be high enough to prevent overinvestment, the economy has generally suffered from periodic overinvestment cycles.

It's not just a coincidence that tax cuts for the rich have preceded both the 1929 and 2007 depressions. 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, over-investment (by 1929 there were over 600 automobile manufacturing companies in the US) caused the depression that made the rich, and most everyone else, ultimately much poorer.

Since 1969 there has been a tremendous shift in the tax burdens away from the rich on onto the middle class. Corporate income tax receipts, whose incidence falls entirely on the owners of corporations, were 4% of GDP then and are now less than 1%. During that same period, payroll tax rates as percent of GDP have increased dramatically. The overinvestment problem caused by the reduction in taxes on the wealthy is exacerbated by the increased tax burden on the middle class. While overinvestment creates more factories, housing and shopping centers - higher payroll taxes reduces the purchasing power of middle-class consumers. ..."

If anything, the case for an overinvestment-induced recession has increased in the five years since that article was written. The timing of such a recession is a key question for those with shorter-term investment horizons. For those with a five-year or longer holding period, maybe not as much. In any case it's always good to remember, as Keynes famously said: "The market can stay irrational longer than you can stay solvent."

An additional source of uncertainty is the labor market. An acceleration in wage growth would certainly increase the prospects of tightening by the Federal Reserve. There are reasons to believe that the 4% unemployment rate may not be an accurate indicator of tightness in the labor markets. As was pointed out in the article, >Disability's Disabling Impact On The Labor Market, historically, labor force participation has behaved cyclically in the midst of a slightly declining trend. Dubious and fraudulent disability claims have vastly increased the number of those collecting disability, with commensurate decreases in labor force participation and the unemployment rate. A segment on CBS, "60 Minutes" quoted employees of the Social Security Administration and administrative law judges who asserted that lawyers are recruiting millions of people to make fraudulent disability claims. One such judge said, "if the American public knew what was going on in our system, half would be outraged and the other half would apply for benefits."

In the article >REML 21.9% Yield Could Compensate For Many Risks, I discussed the possibility that a rebound in the labor force could alleviate fears of an inflationary labor shortage. As to why this rebound in the labor force may be finally occurring, I suggest that some reforms of the disability system that were included in the 2015 budget agreement may be now having an impact. The surge in the number of those collecting disability required a bailout of the disability trust fund that entailed shifting $300 billion from the Social Security disability trust fund. As part of the 2015 budget deal, in return for the disability trust fund bailout that many Republicans opposed, the Obama Administration agreed to phase in reforms to the disability system. These included requiring medical evidence in some cases. This was discussed in detail in: >Disability And Participation. The most recent labor market report indicated a large increase in labor force participation, especially for prime working age men ages 25-54.

Many observers focused on the possibility that the increase in labor force participation could indicate that the strengthening labor market may be inducing many formerly discouraged workers to rejoin the labor force. Those who say they have given up looking for work are termed discouraged and not counted as unemployed, as they are not counted in the labor force. Some believe that the increase in labor force participation is due to formerly discouraged workers rejoining the labor force as the economy improves.

My view is that the more important factor for the increase in reported labor force participation can be seen in the disability rolls data. Many unemployed workers signed up for disability when the length of unemployment insurance was reduced from 99 weeks to 26 weeks. This occurred when only 55 senators, rather than the required 60, supported President Obama's attempt to maintain a longer benefit period. Those collecting disability are not now returning to the labor force.

The decline in the disability rolls and the simultaneous increase in labor force participation is the result of people leaving the disability rolls in the normal way, that is dying. The decline in the disability rolls and the simultaneous increase in labor force participation thus is the result of fewer new enrollees entering the disability system because of the reforms taking effect. Hence, many who would have applied for and received disability under the old regulations are now remaining in the labor force. All of the reforms enacted in 2015 are to be phased in, with some not becoming fully effective until 2022. This could result in less tightness in the labor force, with commensurate higher levels of headline unemployment. This could cause the reported unemployment rate to stabilize or increase. This might remove some of the pressure on the Federal Reserve to raise interest rates.

Analysis of the July 2018 MORL Dividend Projection

My projected August 2018 MORL monthly dividend of $0.0811 is a function of the calendar. 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 that contribute to the dividends in the "small months." Thus, the $0.0811 MORL dividend paid in August 2018 will be a "small month" dividend. 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.

As can be seen in the table below, only three of the MORL components - AGNC (NASDAQ:AGNC), Armour Residential (NYSE:ARR), and Orchid Island (NYSE:ORC) - now pay dividends monthly. Only if a component has a July 2018 ex-date does it contribute to the August 2018 dividend. iStar, Inc. (NYSE:STAR) does not pay any dividends. My projection for the August 2018 MORL dividend of $0.0811 is calculated using the contribution by component method. The table below shows the ticker, name, weight, dividend and ex-date for all of the components, and the price contribution to the dividend for all of the MORL components and its essentially identical twin, the UBS ETRACS Monthly Pay 2XLeveraged Mortgage REIT ETN Series B (NYSEARCA:MRRL) that will contribute to the August 2018 dividend.

The VanEck Vectors Mortgage REIT Income ETF (NYSEARCA: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.

Conclusions and Recommendations

Since 2012, I have been willing to collect and reinvest the approximately 20% yield on a monthly compounded basis that MORL pays while the ultimate answers to questions about the outlook for the economy and securities markets are revealed. I still am. My view is that there will likely be more reductions than increases in the Federal Funds rate during the next five years.

That is not the only reason I'm still a buyer of MORL. As discussed above, there's a possibility that the reforms enacted to the disability program could result in a rebound in labor force participation. This could cause the reported unemployment rate to stabilize or increase. This might remove some of the pressure on the Federal Reserve to raise interest rates. As could the damage to economic activity and the equity markets done by protectionism and/or increases in world tensions.

It still remains to be seen whether the dominating force which has propelled securities higher for a decade can overcome the fiscal profligacy, protectionism, and possible cyclical headwinds now facing the securities markets. Over the last 15 years, securities prices have been supported by the massive tax policy-induced increase in inequality that causes an excess of loanable and investable funds, and that just got a lot stronger with the new tax bill. However, factors such as monetary policy, inflation and the unemployment rate will still have significant impacts on securities prices. As recent events have highlighted, there also are policy and geopolitical factors and events that can influence financial markets.

The length, path, and magnitude of a tax-shift induced cycle are particularly important to investors in leveraged instruments, such as high-yield 2X leveraged ETNs like MORL. No two over-investment 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 mostly via reductions in business taxes.

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, the UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA:CEFL) and the UBS ETRACS 2x Leveraged 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 the article "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.

I still tend to believe that the massive tax-policy-induced increase in inequality will cause increasing excesses of loanable and investable funds above commercially reasonable ways to use those funds. This will eventually result in an overinvestment cycle, and that will ultimately be very good for MORL and the mREITs.

Taking all of this into consideration, I'm still a cautious buyer of MORL and MRRL and have added to them recently. Sometimes, one of those can be bought slightly lower than the other one. The yields are still compelling. However, the uncertainty that seems to be diverging rather than converging 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 also have been buying in my 2X high-yield leveraged ETN portfolio the Credit Suisse X-Links Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:REML), an exchange-traded note that's based on the FTSE NAREIT All Mortgage Capped Index of mREITs. That's the same index used by the iShares Mortgage Real Estate Capped ETF (BATS:REM). 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. 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 Group, while REML is an obligation of Credit Suisse. It's 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's 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 above, My calculation projects an August 2018 monthly dividend of $0.0811. The implied annualized dividends would be $3.073, based on annualizing the most recent three months, including the August 2018 projection. This is a 19.5% simple annualized yield with MORL valued at $15.78. On a monthly compounded annualized basis, it is 21.3%.

Aside from the fact that with a yield of 21.3%, 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 21.3% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $262,713 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $21,300 initial annual rate to $55,984 annually.

MORL Components and Contributions to the Dividend



Weight (%)






Annaly Capital Management Inc






American Capital Agency Corp








New Residential Investment Corp






Starwood Property Trust Inc






Blackstone Mortgage Trust Inc






Two Harbors Investment Corp






Chimera Investment Corp






Apollo Commercial Real Estat






MFA Financial Inc






Invesco Mortgage Capital Inc






Ladder Capital Corp






CYS Investments Inc






Pennymac Portgage Investment








Hannon Armstrong Sustainable Infrastructure Capital Inc








ARMOUR Residential REIT Inc








American Capital Mortgage Investment Corp






New York Mortgage Trust Inc






Redwood Trust Inc






Capstead Mortgage Corp






Arbor Realty Trust Inc






Anworth Mortgage Asset Corp






Western Asset Mortgage Capital Corp






AG Mortgage Investment Trust Inc






Orchid Island Capital Inc








Dynex Capital Inc






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

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.

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Source : https://seekingalpha.com/article/4188416-morl-yield-21_3-percent-still-attractive-outcomes-becoming-uncertain

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