The Lizard King is cutting to the chase this Wednesday and detailing how much you can make on today’s recommendation first. ACTION TO TAKE: BUY UBS ETRACS Mthly Py 2xLvg Mortg REIT ETN (MORL) UP TO $21.00. This is a “hold forever” security so there will be no trailing stop to follow. If you get in at today’s close price you can expect to earn about 20 percent annually for decades. Based on most recent quarter of distributions the indicated current annual yield is 23.85%. Seriously, that is not a typo.
You may be thinking it sounds too good to be true. Let me explain. MORL is an ETN composed of a basket of mortgage Real Estate Investment Trusts (mREITs). These are companies in the real estate sector that are using a tax strategy that allows them to pay no corporate taxes so long as they pass on substantially all free cash flow. So source one of the high distribution is a legally mandated high payout ratio that is tax advantaged.
Source two of high yield is clever manipulation of the yield curve. You see, ordinarily interest rates are higher on long term debt than on short term debt. This opens and opportunity for savvy players to borrow money short term and buy up long term debt that pays more than the short term debt service. (There is some risk from rising interest rates but hedging interest rate risk is the primary thing these firms do.) Like a bank, they leverage their equity to earn a few percent spread several times over. Most of the underlying securities are currently yielding over 10%.
The third source of high yield is that UBS operates this vehicle as an Exchange Traded Note (ETN). The fund is leveraged two to one (minus a 0.40% annual fee) so that each dollar invested collects twice the normal yield on the underlying securities. Ordinarily, raptors have to be wary of leverage (it can kill!) This use of leverage is slightly different though as we will have no margin debt in our brokerage accounts and cannot receive a “margin call” so long as we don’t get crazy and buy an already leveraged product ‘on margin.’
The underlying securities are the biggest most respected names in the mREIT business and the top ten securities, making up over 65% of the notes holdings are below:
|Annaly Capital Management Inc||15.33%|
|American Capital Agency Corp||12.83%|
|Starwood Property Trust Inc||6.46%|
|Chimera Investment Corp||5.14%|
|MFA Financial Inc||5.10%|
|Two Harbors Investment Corp||4.95%|
|Northstar Realty Finance Cor||4.60%|
|Invesco Mortgage Capital Inc||4.45%|
|Hatteras Financial Corp||3.91%|
|Newcastle Investment Corp||3.54%|
I get the above yield estimate from the last three month’s distributions of $0.949, $0.1316, $0.1206, annualized to $4.8048. Versus an imputed cost basis of 20.15: 4.8048/20.15 = 23.85%. The yield will rise and fall over time as the note re-balances its holdings monthly and the yield on the underlying securities changes from time to time based on prevailing market forces. But if you get in at today’s closing price, it is reasonable to expect decades of yields over 20%. Raptors that DRIP their distributions will do even better! I’ll be tracking performance for purposes of the blog based on today’s price of 20.15 instead of my personal purchase price from over a year ago.
Devour your prey, raptors!