Mortgage REIT Dividends: How Spread Risk and Book Value Volatility Impact Your Income

Why Mortgage REIT Dividends Can Be So High - And So Unstable

Most investors know REITs pay high dividends. But mortgage REITs (mREITs) don’t just pay more - they deliver yields that can be double or triple what you get from stock market averages. In 2024, the average mREIT dividend yield hovered around 10.2%, compared to the S&P 500’s 1.27%. That’s tempting. But here’s the catch: those dividends aren’t guaranteed. They’re tied to something called spread risk - and when interest rates move, your book value can crash overnight.

How Mortgage REITs Actually Make Money

Unlike equity REITs that own apartment buildings or shopping centers, mortgage REITs own debt. They buy residential and commercial mortgage-backed securities (MBS), which are bundles of home loans. They fund these purchases with short-term debt - think overnight loans or repurchase agreements (repos). Their profit? The difference between the interest they earn on those mortgages and the interest they pay to borrow money. That gap is called the net interest spread.

For example, if an mREIT borrows money at 4.5% and invests in mortgages paying 6.2%, the 170-basis-point spread is their profit. Simple, right? But here’s where it gets dangerous. When the Federal Reserve raises short-term rates, borrowing costs jump immediately. Mortgage yields, however, don’t reset as fast. Many mortgages are fixed-rate. So the spread shrinks - and so does the dividend.

Most mREITs use heavy leverage. It’s common to see debt-to-equity ratios of 8:1. That means for every $1 of shareholder money, they borrow $8. That multiplies returns - but it also multiplies losses. A 5% drop in the value of their mortgage portfolio can wipe out all their equity if they’re over-leveraged.

Book Value Volatility: The Hidden Crash Risk

Book value per share is the net asset value of an mREIT’s portfolio. It’s not just a number - it’s your safety cushion. When interest rates rise, the market value of fixed-rate mortgages falls. That’s basic bond math: higher rates = lower prices. Since mREITs must mark their holdings to market every quarter, that loss hits their book value directly.

In 2022, when the Fed hiked rates aggressively, the average mREIT lost 23.7% of its book value. That’s not a small dip. That’s a 1-in-4 value wipeout in less than a year. Compare that to equity REITs, which lost only 14.2% during the same period. Why? Because physical properties don’t get marked down daily. Their value changes slowly. Mortgage securities? They’re liquid - and that liquidity turns into volatility.

And it’s not just about rates. Prepayment risk matters too. When rates fall, homeowners refinance. That means the mortgages in an mREIT’s portfolio get paid off early. The mREIT gets cash back - but now it has to reinvest at lower rates. That crushes future income. A 10% increase in prepayment speed can slash net interest margins by 15 basis points, according to VanEck.

Dividend Cuts Are Common - And Often Predictable

Here’s what investors don’t always realize: mREITs must pay out 90% of taxable income to avoid corporate taxes. But taxable income isn’t the same as cash flow. When spreads shrink, companies can still pay dividends by selling assets at a gain or drawing down capital. That’s not sustainable.

AGNC Investment Corp, one of the biggest mREITs, cut its dividend from $0.45 per quarter in 2021 to $0.15 in 2022 - a 66.7% drop. Annaly Capital Management’s book value fell nearly 20% between January and June 2024, yet it kept paying a 10.2% yield. That’s not a sign of strength - it’s a sign they’re eating into their own capital.

Historical data shows mREITs cut dividends 23.4% of the time in 2022. Equity REITs? Just 0.8%. And it’s not random. When the TED spread - the gap between 3-month LIBOR and 3-month Treasury yields - rises above 50 basis points, mREITs cut dividends 82% of the time within six months. That’s a reliable warning sign.

How to Spot Trouble Before It Hits Your Portfolio

Don’t just look at the yield. Look at the price relative to book value.

• If the stock trades above book value by more than 10%, the market may be overestimating future earnings. That’s a red flag.
• If it trades below book value by 20% or more, you might be getting a bargain - if the company’s hedges and funding are stable.

Check the quarterly earnings reports. Ignore GAAP earnings - they include one-time gains and losses. Look for core earnings. That’s the real, recurring profit. If core earnings are falling but dividends stay flat, the dividend is being funded by capital, not income.

Also, track hedge coverage. In 2018, mREITs hedged only 35% of their interest rate risk. Today, it’s 65%. That’s progress. But hedges cost money. If a company spends 40% of its income on swaps, that eats into your yield. Ask: Is the hedge working? Or is it just masking deeper problems?

Are mREITs Worth It in 2025?

They can be - but only if you understand what you’re buying. mREITs aren’t passive income machines like dividend stocks. They’re tactical bets on interest rate spreads. They thrive when the yield curve is steep: short-term rates low, long-term rates high. They collapse when the Fed hikes fast or when credit markets freeze.

As of mid-2024, the spread between 10-year Treasuries and mortgage rates is around 170 basis points - near its lowest level since 2000. That’s not a wide cushion. If rates rise another 50 basis points, many mREITs could see spreads shrink into negative territory.

But there’s hope. Newer mREITs use better tools: interest rate swaps, longer-term funding, and tighter credit standards. The first actively managed mREIT ETF, Global X MREI, launched in June 2024, giving investors more control over exposure. And in Q1 2024, despite a Fed rate hike, the sector’s book value only dropped 2.1% - a far cry from the 8.7% drop in 2022. That suggests better risk management is working.

Still, the Urban Land Institute put it bluntly: mREITs will always carry higher risk than equity REITs. They need to offer at least a 300-basis-point yield premium over traditional bonds to justify that risk. If they don’t, investors will walk.

Who Should Invest in Mortgage REITs?

If you’re looking for steady, predictable income - skip mREITs. Stick with equity REITs or bonds.

If you’re an experienced investor who:

• Understands interest rate cycles
• Can monitor quarterly reports and hedge ratios
• Has a long-term horizon and can tolerate 20%+ swings in value
• Is willing to sell when spreads narrow or book value drops too far

Then mREITs might fit your portfolio. But never buy them for the yield alone. Buy them because you understand the mechanics - and you’re ready for the ride.

The Bottom Line

Mortgage REITs offer high dividends - but they come with high risk. The spread between borrowing costs and mortgage yields is their lifeblood. When that spread narrows, dividends get cut. When rates spike, book values crash. They’re not for beginners. They’re not for retirees who need reliable income. But for investors who know how to read the signals - and have the stomach for volatility - they can deliver outsized returns over time. Just don’t ignore the fine print. Your dividend isn’t guaranteed. Your book value isn’t safe. And your capital isn’t protected.