Look Out for Falling mREIT Dividends

So far, 2013 has been sweet to stocks, with the month of March being especially delightful. The Dow Jones Industrial Average has stayed up above the 14,000 mark this month, hitting highs not seen in years. In the banking sector, the positive results of the Fed's latest stress tests has investors buzzing about seeing increased dividends from the biggest banks, some of which have been awarding embarrassingly skimpy payouts since the financial crisis.

Unfortunately, dividend news is much less agreeable from the lethargic mortgage REIT sector, which has been known in the past for its payout power. Those that invest primarily in government-sponsored-entity paper have been particularly hard-hit, and companies like Annaly Capital (NYSE: NLY  ) , Hatteras Financial (NYSE: HTS  ) , and Apollo Residential Mortgage (NYSE: AMTG  ) have all slashed dividends over the past few months. Late last week, CYS Investments (NYSE: CYS  ) joined the lineup, declaring a dividend that dropped to $0.32 from the previous $0.40.

A battle-scarred sector
As stalwart mREIT investors well know, the Fed's QE3 program has been squeezing these trusts, crimping profits as spreads continue to contract. Annaly's spread decreased to 0.95% in the last quarter, a decrease of 76 basis points year over year, and seven BPS from the prior quarter. Hatteras saw its spread drop to 1.08% last quarter from 1.22% in the third quarter, and 1.56% from one year prior.

Likewise, CYS saw its spread fall to 1.08% from 1.41% in Q3, and a far cry from its 1.80% from the fourth quarter of 2011. Only Apollo kept its spread intact, at 2.7%, from the last three months of 2011 to the last quarter of 2012.

Dividends suffer for most
As spreads compress, so have the dividends paid. CYS' payout has dropped steadily since its heyday of 2010 to 2011, when it hovered at $0.60 for five quarters. More recently, it paid $0.50 as recently as last June. Hatteras paid out a $0.90 quarterly dividend in June, which shrank to $0.70 this past December. Apollo's December payout of $0.70 was less than its $0.85 paid at the end of September, and Annaly last announced a divvy of $0.45 at the end of the fourth quarter, down from the $0.55 it bestowed in June of last year.

Notably, however, both CYS and Apollo paid a special dividend at the end of December -- CYS in the amount of $0.52, and Apollo, $0.35. While both companies explained  the special payment as a way to clear the decks of 2012 taxable income, it surely doesn't bode well for divvy payments coming up this year.

Hope springs eternal
All is not doom and gloom, however. Though Fed Chair Ben Bernanke recently reiterated his commitment to big mortgage-backed security purchases, a vocal minority on his board are clamoring to cut the easing short. Since unemployment numbers came in a smidge better late last week, this concept may gain traction.

Just as many investors have seen the losses of the past few years recede as of late, waiting out the present environment may be investors' best bet. In the world of investing -- as in so many things in life -- patience truly is a virtue.

There's no question Annaly Capital's double-digit dividend is eye-catching. But can investors count on that payout sticking around? With the Federal Reserve keeping interest rates at historically low levels, Annaly has had to scramble to defend its bottom line. In The Motley Fool's premium research report on Annaly, senior analysts Ilan Moscovitz and Matt Koppenheffer uncover the key challenges the company faces and divulge three reasons investors may consider buying it. Simply click here now to claim your copy today!


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