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Strategies & Market Trends : Dividend investing for retirement -- Ignore unavailable to you. Want to Upgrade?

To: Elroy who wrote (15900)	7/14/2013 3:37:26 PM
From: Lottopol	Read Replies (1) \| Respond to of 34328

seekingalpha.com ""...The mathematics of leveraged mREITs is fascinating. One calculation that many will find hard to believe, suggests that an investor who made a single one-time investment in MORL at the all-time high price of $32.25 on April 12, 2013 with the intention of holding for ten years and reinvesting all dividends during that period, could in a sense be better off now as a result of the carnage in the mortgage markets. This is completely counter-intuitive since MORL closed today, July 10, 2013 at $19.79. To understand this amazing result consider a thought experiment where an investor who bought $10,000 of MORL at the all-time high price of $32.25 on April 12, 2013 is now given a choice by some omnipotent force of having universe 1 or universe 2. In universe 1 MORL behaves as the investor presumably expected when the purchase was made on April 12, 2013. At a price of $32.25 and an annualized dividend based on the trailing three months of $5.86. That represented a simple yield of 18.2% and an effective compounded yield of 19.8%. If the investor chooses universe 1 all the unpleasantness in the mortgage market that occurred since April 12, 2013 never happened and the investor receives the expected return based on the price and yield on April 12, 2013. Thus, by April 12, 2023 the investor's $10,000 has grown to $60,749.13. Effectively, in universe 1 MORL remains at the price of $32.25 and the dividend remains at the previous level. In universe 2 everything that actually happened since April 12, 2013 occurs. The price of MORL falls to $19.79. AGNC and NLY, the largest components of MORL cut their dividends so that the annualized dividend based on the trailing three months of MORL is now down to $5.39. In universe 2 the investor still made his single one-time investment in MORL at the all-time high price of $32.25 on April 12, 2013 with the intention of holding for ten years and reinvesting all dividends during that period. He has a large unrealized loss on July 10, 2013. In universe 2, from today on, the investor receives the expected return based on the actual price and yield today, throughout the rest of the period until April 12, 2023. Intuitively, one would assume that if an mREIT investor who bought at the top on the April 12, 2013 could magically make everything that occurred since then disappear, they would do so. However, even though the hypothetical investor's account had fallen from $10,000 on April 12, 2013 to $6,477.17 today, the investor is still better off by choosing universe 2. That is because at today's price of $19.79 and an annualized dividend based on the trailing three months of $5.39, MORL now has a simple yield of 27.2% and an effective compounded yield of 30.9%. That means that in universe 2 the account value at the end of the 10-year period April 12, 2023 is $89,281.29. Obviously an investor who intended to make periodic additions to his account rather than a single one-time investment on April 12, 2013 would do even better in universe 2 and would view the recent carnage in the mREITs as a great buying opportunity. Source: A Depression With Benefits: The Macro Case For mREITs