Mortgage real estate investment trusts (mREITs) are popular with investors because of their high yields.

However, mREITs can be volatile due to changing interest rates.

They borrow money in the short term at low rates and lend it out at higher rates in the long term.

When the difference, or “spread,” between short- and long-term rates is small, it’s harder for mREITs to make money. When it widens, mREITs increase their earnings.

The spread has been very tight recently, causing profits to slide for most mREITs. But if the Fed raises rates, it could widen the spread and make mREITs more profitable.

Let’s take a look at AG Mortgage Investment Trust (NYSE: MITT). This small cap mREIT sports an attractive 12.2% yield… but is the yield safe?

Declining Net Interest Income

With regular stocks, we’d focus on earnings or cash flow, but for mREITs, the important metric is net interest income (NII).

This is the difference between interest earned and interest paid. he real barometer of an mREIT’s business.

In the first six months of the year, AG Mortgage’s NII was $43.9 million. That’s 25% less than it was six months into 2015. That’s not a good sign.

NII has fallen the past two years and now looks like it’ll drop for the third year in a row.

If the company is making less money, it makes sense for it to pay shareholders less in dividends.

And that’s exactly what’s happened.

AG Mortgage has cut its dividend twice since 2013. It paid an $0.80 per quarter dividend  in the first half of 2013, which would have been $3.20 annually. Today it’s 41% lower, at $0.475 per quarter, or $1.90 annually.

The good news is the company’s NII covers its dividend… for now.

In the first six months of the year, AG Mortgage generated $43.9 million in NII while paying shareholders $26.9 million in dividends.

But if NII continues to deteriorate (as it has for the past few years), the company may lower its dividend for a third time.

AG Mortgage’s dividend track record and history of falling NII don’t inspire confidence. If rates rise and NII increases, it’ll make me feel better about the stock.

But until then, a dividend cut wouldn’t surprise me.

Dividend Safety Rating: D