Covestor model: Stable High Yield
When I first began studying mortgage real estate investment trusts (mREIT), one of the first insights I gleaned came from an online message board.
“No run-up to the ex-date!” posted profitdog3879 about one of his mREIT holdings. The contributor’s enthusiasm made me assume he preferred to capture the dividend rather than sell just ahead of the ex-dividend date, when the price is often at a quarterly high. He was a longer-term holder, rather than a trader who thought he could sell high and then re-buy low on the ex-date.
With a high-yielding stock like an mREIT, many investors are initially attracted by the dividend alone. But even though the volatility of high-quality mREITs has been low in the past few years, share prices do move up and down. As with any dividend stock (i.e., one with a yield of, say, 5% or better) there is often a run-up in price prior to the ex-date. Theoretically, the closing price on the ex-date is reduced by the dividend amount, adjusted for taxes.
Of course, it doesn’t happen in a vacuum. It’s an inexact event, as prices on the ex-date are also influenced by general market moves. But after owning these things for a while, an investor might wonder whether it’s better to sell a mREIT on the day before the ex-date and then buy it back in a day or two, or to hang on, capture the dividend, but then suffer the drop in share price until it begins rising again in anticipation of the next ex-date.
The reason for the question at all is that for the negligible transaction costs of four trades per year, maybe trading mREITs is better than holding them to collect their juicy dividends.
To obtain a general sense of which, if either, was the better strategy for my portfolio , I set about a simple exercise that, regardless of the outcome, would satisfy my curiosity.
I evaluated the most recent 91 ex-dividend dates for six prominent agency mREITs: American Capital Agency Corp. (AGNC), Annaly Capital Management (NLY), CYS Investments Inc. (CYS), Anworth Mortgage Asset Corp. (ANH), Capstead Mortgage Corp. (CMO), and Hatteras Financial Corp.(HTS). CYS has been issuing dividends only since October 2009, resulting in this odd total of 91.
The results were inconclusive as to a clearly preferred route, but not as to answering the question. That neither strategy was patently better was an answer in itself. With a personal bias for buying and holding instead of frequent trading, and because mREITs are viewed by many as more akin to leveraged bond funds than stocks, I was surprised (and just a bit dismayed) to find that in 55 of the 91 instances it would have been more profitable to sell the mREIT on the day prior to the ex-date and buy it back on the ex-date.
That implied 60% chance of doing better by trading rather than holding isn’t very persuasive, though, and not just because of this surface result. You see, I also found that in nearly half of the cases (24 out of the 55) where it would have been better to do the trade, the Standard & Poor’s 500 closed down on the ex-date.
Now, whether the negative market on those days made the trade more profitable than it would have been otherwise is a question that I have no compelling desire to explore. But the downdraft was doubtlessly welcomed by the trader who was able buy back his mREIT that much cheaper.
For my purposes, the question was wholly and definitively answered, to wit: Sometimes making the trade is better than holding through the ex-date, and sometimes it isn’t.
For an mREIT investor, the focus should be on such mundane matters as interest-rate spreads and constant prepayment rates. The sexier ex-date question can be dismissed.