Look Out for Falling mREIT Dividends: Annaly Capital Management, Inc. (NLY), Hatteras Financial Corp. (HTS)

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 Management Inc. (NYSE:NLY), Hatteras Financial Corp. (NYSE:HTS) , and Apollo Residential Mortgage Inc (NYSE:AMTG) have all slashed dividends over the past few months. Late last week, CYS Investments Inc (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 Financial Corp. (NYSE:HTS) 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 Financial Corp. (NYSE:HTS) 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 Capital Management, Inc. (NYSE:NLY)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.