Source: Armour Residential.

ARMOUR Residential (NYSE:ARR) significantly cut back on dividend payments over the last two years. 2013 was a particularly bad year for the mortgage REIT as it posted frightening declines in its book value. Lower profitability led the company to adjust its dividends, which led to a 42% decline in ARMOUR Residential's share price in 2013.

Until the mortgage REIT has demonstrated that it can stop the book value bleeding, you shouldn't be in a hurry to buy.

The mortgage REIT sector certainly wasn't good in 2013. With investors expecting the Federal Reserve to scale back its asset purchases, an increase in long-term interest rates, and higher interest volatility, mortgage REITs came under tremendous pressure throughout much of the year.

One of the companies most beaten was ARMOUR Residential.

ARMOUR Residential is a mortgage REIT that invests in agency residential mortgage-backed securities. Agency mortgage-backed securities come with a nice little feature: Principal and interest payments from the underlying mortgages are backed by guarantees of Fannie Mae, Freddie Mac, and Ginnie Mae. The implicit (in the case of Fannie Mae and Freddie Mac) and explicit government guarantees (for Ginnie Mae) provide investors with protection against default risk.

Among the securities ARMOUR Residential invests in are: hybrid adjustable-rate, adjustable-rate, and fixed-rate RMBS.

Agency mortgage-backed securities basically relate to mortgages where higher underwriting standards are applied. Non-Agency securities, on the other hand, are generally considered to be of lower loan quality and, therefore, pose higher risk for mortgage investors.

Don't just look at the dividends
ARMOUR Residential is a high-income vehicle. But investors definitely shouldn't take ARMOUR Residential's dividends for granted.

ARMOUR Residential has substantially reduced its dividend payments to shareholders over the last couple of years. While ARMOUR Residential paid $1.52 per share in 2010, the mortgage REIT has adjusted its payouts to $0.81 per share in 2013: A total decline of 47%.

Source: Armour Residential Investor Relations.

Strong book value declines
Probably the biggest reason why ARMOUR Residential's shares came under fire in 2013 was the mortgage REIT posting frightening declines in its book value.

As you can see by the chart, ARMOUR Residential destroyed quite a bit of shareholder value over the last year alone. So it comes as no surprise that ARMOUR Residential has been among the worst performing mortgage REITs in the sector.

ARMOUR Residential reported a book value of $7.29 per share at the end of the fourth quarter 2012, yet it continuously declined to $4.67 in the first quarter of 2014. That's a total decline of 36% in book value in just over the last five quarters.

Source: Armour Residential Investor Relations.

While other mortgage REITs like Annaly Capital Management (NYSE:NLY) or American Capital Agency (NASDAQ:AGNC) managed to increase their book values in the first quarter of 2014, ARMOUR Residential continued to lose ground.

Though Annaly's book value only increased by 1.4% in the first quarter on a sequential basis and the book value of American Capital Agency Corporation grew only 2.3%, these are still positive developments. Investors of those two mortgage REITs are optimistic, as those companies managed to stop the book value bleed in the short-term.

ARMOUR Residential, on the other hand, still doesn't appear to be out of the woods. Most importantly, with ongoing declines in book value, there is a good chance that ARMOUR Residential will continue to cut its dividend payments.

The Foolish bottom line
Though ARMOUR Residential presently exhibits a dividend yield of nearly 14%, investors should be carefully watching ARMOUR Residential's book value in the coming quarters. This should yield a clue as to whether further dividend cuts are looming down the road.