mREIT Share Prices are Falling but Do Their Dividends Fill the Gap?

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A combination of falling dividend payouts and concerns about future Federal Reserve policy have hit the shares of highly levered mortgage REITs hard in recent months.

This selling has been compounded in the last few weeks as the yield on US government debt has started to rise back up to realistic levels, which has spurred investors to dump mREIT stocks in favor of the relatively risk free government debt.

Having said that, one of the best ways to protect a portfolio through any kind of market turbulence is by purchasing securities that offer a high dividend yield to smooth out a portfolio's total return. There are no other stocks on the market right now that offer a higher dividend yield than mREITs.

So, based on their performance during the last few months, has the total return on these securities been enough to give investors a better total return on their investment than the rest of the market, despite their declining share prices?

Annaly Capital Management (NYSE: NLY)

<table> <thead> <tr><th> <p>Date</p> </th><th> <p>3Q 2012</p> </th><th> <p>4Q 2012</p> </th><th> <p>1Q 2013</p> </th><th> <p>2Q 2013</p> </th><th> <p>Current</p> </th><th> <p>Gain/Loss</p> </th><th> <p>Percentage change</p> </th></tr> </thead> <tbody> <tr> <td> <p>Share price</p> </td> <td> <p>$17.11</p> </td> <td> <p>$16.90</p> </td> <td> <p>$14.60</p> </td> <td> <p>$15.70</p> </td> <td> <p>$13.50</p> </td> <td> <p>-$3.61</p> </td> <td> <p>-21.10%</p> </td> </tr> <tr> <td> <p>Dividend</p> </td> <td> <p>$0.55</p> </td> <td> <p>$0.50</p> </td> <td> <p>$0.45</p> </td> <td> <p>$0.45</p> </td> <td> <p>-</p> </td> <td> <p>$1.95</p> </td> <td> <p>11.40%</p> </td> </tr> </tbody> </table>

First is Annaly Capital, which has seen its stock price decline 21.1% during the last four quarters. In the same period, the company paid out $1.95 per share in dividends, or a return of 11.4% on the original investment.

<table> <thead> <tr><th> </th><th> <p>Dollar value</p> </th><th> <p>Percentage change</p> </th></tr> </thead> <tbody> <tr> <td> <p>Total return</p> </td> <td> <p>-$1.66</p> </td> <td> <p>-9.70%</p> </td> </tr> </tbody> </table>

Unfortunately, Annaly's healthy dividend payout was not enough to offset its share price decline, and investors have lost out by $1.66 per share, or 9.7% during the last four quarters.

American Capital Agency (NASDAQ: AGNC)

<table> <thead> <tr><th> <p>Date</p> </th><th> <p>3Q 2012</p> </th><th> <p>4Q 2012</p> </th><th> <p>1Q 2013</p> </th><th> <p>2Q 2013</p> </th><th> <p>Current</p> </th><th> <p>Gain/Loss</p> </th><th> <p>Percentage change</p> </th></tr> </thead> <tbody> <tr> <td> <p>Share price</p> </td> <td> <p>$33.60</p> </td> <td> <p>$35.15</p> </td> <td> <p>$31.15</p> </td> <td> <p>$33.20</p> </td> <td> <p>$25.56</p> </td> <td> <p>-$8.04</p> </td> <td> <p>-23.93%</p> </td> </tr> <tr> <td> <p>Dividend</p> </td> <td> <p>$1.25</p> </td> <td> <p>$0.00</p> </td> <td> <p>$1.25</p> </td> <td> <p>$1.25</p> </td> <td> <p>-</p> </td> <td> <p>$3.75</p> </td> <td> <p>11.16%</p> </td> </tr> </tbody> </table>

Next is American Capital Agency, which has also seen its share price decline more than 20% during the past year, while investors have received dividend payouts totalling 11.2% of their original investment.

<table> <thead> <tr><th> </th><th> <p>Dollar value</p> </th><th> <p>Percentage change</p> </th></tr> </thead> <tbody> <tr> <td> <p>Total return</p> </td> <td> <p>-$4.29</p> </td> <td> <p>-12.77%</p> </td> </tr> </tbody> </table>

Once again, despite its healthy dividend payout, American Capital's total return is not positive, and the declining share price has wiped out all of the returns investors have received from the dividends. However, the large dividend payout has halved the losses investors would have suffered if there was no payout.

Chimera Investment Corporation (NYSE: CIM)

<table> <thead> <tr><th> <p>Date</p> </th><th> <p>3Q 2012</p> </th><th> <p>4Q 2012</p> </th><th> <p>1Q 2013</p> </th><th> <p>2Q 2013</p> </th><th> <p>Current</p> </th><th> <p>Gain/Loss</p> </th><th> <p>Percentage change</p> </th></tr> </thead> <tbody> <tr> <td> <p>Share price</p> </td> <td> <p>$2.51</p> </td> <td> <p>$2.74</p> </td> <td> <p>$2.69</p> </td> <td> <p>$3.26</p> </td> <td> <p>$3.10</p> </td> <td> <p>$0.59</p> </td> <td> <p>23.51%</p> </td> </tr> <tr> <td> <p>Dividend</p> </td> <td> <p>$0.09</p> </td> <td> <p>$0.09</p> </td> <td> <p>$0.09</p> </td> <td> <p>$0.09</p> </td> <td> <p>-</p> </td> <td> <p>$0.36</p> </td> <td> <p>14.34%</p> </td> </tr> </tbody> </table>

Chimera's investors have fared better than those of Annaly and American capital. Chimera's stock price has gained 23.5% during the last year, leading to total returns of nearly 40% on an investor's original investment, as shown below.

<table> <thead> <tr><th> </th><th> <p>Dollar value</p> </th><th> <p>Percentage change</p> </th></tr> </thead> <tbody> <tr> <td> <p>Total return</p> </td> <td> <p>$0.95</p> </td> <td> <p>37.85%</p> </td> </tr> </tbody> </table>

Two Harbors Investment Corp (NYSE: TWO)

<table> <thead> <tr><th> <p>Date</p> </th><th> <p>3Q 2012</p> </th><th> <p>4Q 2012</p> </th><th> <p>1Q 2013</p> </th><th> <p>2Q 2013</p> </th><th> <p>Current</p> </th><th> <p>Yearly Gain/Loss</p> </th><th> <p>Percentage change</p> </th></tr> </thead> <tbody> <tr> <td> <p>Share price</p> </td> <td> <p>$10.26</p> </td> <td> <p>$11.91</p> </td> <td> <p>$11.67</p> </td> <td> <p>$13.95</p> </td> <td> <p>$10.98</p> </td> <td> <p>$0.72</p> </td> <td> <p>7.02%</p> </td> </tr> <tr> <td> <p>Dividend</p> </td> <td> <p>$0.40</p> </td> <td> <p>$0.36</p> </td> <td> <p>$0.55</p> </td> <td> <p>$0.32</p> </td> <td> <p>-</p> </td> <td> <p>$1.63</p> </td> <td> <p>15.89%</p> </td> </tr> </tbody> </table>

Finally, we come to Two Harbors, which has seen its share price gain around 7% during the four quarter period. In the same period investors also received $1.63 in dividends, or 15.9% return on their original investment.

<table> <thead> <tr><th> </th><th> <p>Dollar value</p> </th><th> <p>Percentage change</p> </th></tr> </thead> <tbody> <tr> <td> <p>Total return</p> </td> <td> <p>$2.35</p> </td> <td> <p>22.90%</p> </td> </tr> </tbody> </table>

Overall, Two's investors have made a total return of 22.9% on their investment.

Comparison to the market

How do these returns compare to the market? Well, taking into account an average yield of 2% on the S&P 500 over the last four quarters the index has returned around 28%.

<table> <thead> <tr><th> </th><th> <p>S&P 500</p> </th><th> <p>Annaly</p> </th><th> <p>American Capital</p> </th><th> <p>Chimera</p> </th><th> <p>Two </p> </th></tr> </thead> <tbody> <tr> <td> <p>Total return</p> </td> <td> <p>28%</p> </td> <td> <p>-9.7%</p> </td> <td> <p>-12.8%</p> </td> <td> <p>37.9%</p> </td> <td> <p>22.9%</p> </td> </tr> </tbody> </table>

So, during the past year investors who have been lured into high-yielding mREITs have lost out when total returns are compared to the market.

So what now?

The dividend payouts on offer from these mREITs have softened the blow from falling stock prices, but they have not improved investor returns.

However, over a longer time period the opposite may be true; for example Annaly Capital, since its inception back in 1997, has returned around 600% for investors, beating the S&P 500 by 500%! Two Harbors has returned about 230% since inception in 2008, only slightly more than the residential REIT index, which returned 190%. American Capital Agency returned up to 300% over the same period, but due to the market's recent pullback, this has fallen to around 200%. Meanwhile, Chimera's total return since 2008 is negative 60%.

However, these results do not include pre-2008, which was the mortgage-backed-securities' heyday, so I am hesitant to say that these returns are a true representation of the facts.

In addition, Federal Reserve policy remains uncertain, and any reduction of the $85 billion a month in bond purchases will really change the outlook for the sector.

Conclusion

Over the past four quarters, the high dividend payouts from these mREITs have on average, not been enough to offset declines in the stock price. In addition, there is not a significant amount of evidence to support the argument that over a multi-year period total returns will outperform the market.

Based on that and the current uncertainty over future Fed policy I would avoid mREITs.

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Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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