The UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL) has a trailing 12-month dividend yield of 23.19% as of October 23, 2018. 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, $3.25).
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 MVIS Global Mortgage REITs Index is a market capitalization-weighted index that tracks the performance of the most liquid global mortgage real estate investment trust (REIT) companies that derive at least 50% of their revenues from mortgage-related businesses. The index components have a market cap of at least $150 million, a three-month average daily trading volume of at least $1 million and a trailing six-month average monthly volume of at least 250,000 shares traded per month.
Why MORL Offers a Double-Digit Dividend Yield
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 continued low-interest-rate environment and the mortgage REIT's strong earnings attributed to MORL's 23.19% dividend in October 2018. However, the ETN's ability to offer a dividend yield above 20% is primarily due to its leverage. Since the ETN offers twice the leveraged exposure to the MVIS Global Mortgage REITs Index, MORL receives two times the dividend payments that each of its underlying index's constituents pays out.
MORL Dividend Pattern
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. For example, in 2017, it paid a dividend of 73.8 cents, 69.3 cents, 70.8 cents and 71.8 cents in January, April, July and October, respectively. The ETN distributed a total of $3.33 per note in 2017. Therefore, 85% of that distribution was paid out during those four months.