Rising Treasury yields hampered several previously prized income-generating asset classes to varying degrees in 2013.
Exchange traded funds holdings shares of conservative utilities and telecommunications stocks will finish the year with attractive yields in tact, but those ETFs will also be well off the pace set by the S&P 500. [Tepid on Telecom ETFs]
Some ETFs holding real estate investment trusts (REITs) will not be so lucky as that asset class lived up to its billing as “rate sensitive.” REIT ETFs that were stung by rising Treasury yields include the Market Vectors Mortgage REIT Income ETF (NYSEArca: MORT) and the iShares Mortgage Real Estate Capped ETF (NYSEArca: REM).
Although MORT is sporting a year-to-date loss of just a third of a percent and REM’s is a tolerable 3.3%, mortgage REITs have been the opposite of shelter from a rising rates storm. REM and MORT’s constituents hold pools home loans bundled into securities, provide a large rate of return to investors by borrowing money and leveraging their portfolios. Combine those factors with the Federal Reserve’s easing policies, and there is an explanation for the success of these ETFs in recent years. [Rising Rates Burn Mortgage REIT ETFs]
However, higher interest rates diminish the chances that homeowners will refinance their mortgage rates. Consequently, the securities have declined in value to reflect the rising risk of holding high duration bonds over a longer period. Many mortgage REITs did not anticipate the sharp spike in interest rates and the result was a rash of dividend cuts from REM and MORT holdings.
Annaly Capital (NYSE: NLY), REM and MORT’s largest holding, paid 35 cents a share in the third quarter after paying 50 cents a share last year. American Capital Agency (NasdaqGM: AGNC) paid a third-quarter dividend of 80 cents a share after paying $1.25 per share in the year-earlier quarter. Two Harbors Investment (NYSE: TWO) delivered a third-quarter dividend 22.2% below what it paid in the same quarter a year ago. Invesco Mortgage Capital’s (NYSE: IVR) was slashed by 23%. [American Capital Hampers mREIT ETFs]
Those stocks combine for over a third of REM’s weight, though despite the spate of dividend reductions, REM and MORT will not see dramatically lower 2013 dividends. Based on a projection of 58 cents per share for the current quarter, MORT appears on pace to pay $2.52 per share this year. That is down from $2.76 a share last year, according to issuer data.
REM’s 2013 payout will be about $1.86 a share, which will top the $1.72 investors received last year, though that could be the result of some of the ETF’s holdings recently declaring special dividends.
REM 2012-2013 Distribution History
Chart Courtesy: iShares
Tom Lydon’s clients own shares of REM.