Recently, I wrote about “3 Unknown But Airtight Dividend Plays” and followed up with general tips about dividend investing that included understanding the importance of holding for the long term and checking for the sustainability of those payouts.

But the emails have continued to flow in, and I’ve noticed many readers seem fixated on a very small slice of the dividend stocks universe. Specifically, mortgage real estate investment trusts. As the name implies, these are REITs (a special class of stock that delivers 90% of taxable income back to shareholders via dividends) that deal in mortgages instead of physical real estate.

And I’m a bit startled to see that some people aren’t familiar with the inherent risks in these stocks, or the rather volatile nature of their dividends. So here’s a primer.

What’s an mREIT?

Let’s be clear about what makes a mortgage REIT different from its kin in the REIT universe. Most REITs own a bunch of land that generates reliable cash, and thus reliable dividends. A company like HCP (NYSE:HCP), for instance, is an operator of senior housing and gets monthly checks from tenants. Public Storage (NYSE:PSA) is a REIT that operates those storage sites across America, which have steady rent. Rayonier (NYSE:RYN) is a timber company that owns a lot of forest land and generates cash from cutting down the trees there. You get the idea.

But mREITs deal not in property but in paper. Specifically, in mortgage-backed securities.

Yes, those mortgage-backed securities. The ones at ground zero of the financial crisis.

It gets juicier. The way these companies throw off massive yield is through “leverage,” which is the Wall Street way of saying they borrow up to their eyeballs to generate big profits. Mortgage REITs aggressively borrow funds at a lower rate than the MBS they invest in and profit from the difference. The spread between their borrowing rate and the MBS yield is how they profit.

What Are mREIT Risks?

Some investors simply don’t know enough about mREITs and are unaware of this connection. All they see are the double-digit yields.

Others, however, know the risks and simply don’t mind. After all, the dividends have been nice in recent years. And to be honest, many mREITs aren’t that much more risky than peers in the financial sector. Insurance companies use leverage. And many banks are levered up as much or more and have just as much exposure to trouble in the housing market.

I personally have no problem with mREITs as a group. They’re just another tool in investors’ toolbox, with possible risks and possible rewards.

But don’t think the downside risk is just to share prices based on yield spreads or any mortgage market shenanigans. The fact is that unlike some of their bulletproof REIT brethren with a strong history of dividends, mREIT payments are anything but guaranteed. The dividends are volatile and subject to sharp swings downward, meaning the annualized yields you see on Google Finance and Yahoo! Finance aren’t fair representations of what you’ll actually get paid.

mREITs and Their Volatile Dividends Explained

Let’s look at a conventional REIT. One of my favorites right now is the aforementioned HCP. It’s a great demographic play on aging baby boomers, and health care is always recession-proof. What’s more, HCP has increased its dividend annually for 25 years and has never cut a payout. Its nice yield of 4.5% is pretty sure thing.

Now, let’s look at a popular mREITs by contrast.

First up is Annaly Capital Management (NYSE:NLY). It’s had some recent earnings trouble with missed EPS expectations and sliding revenue. But for the sake of keeping things moving I want to focus solely on the dividend here because that’s the biggest selling point to investors. The headline yield is 13% based on a $2.20 annual payout. But closer examination makes that payout less attractive.

You see, that yield is calculated based on its last quarterly payout of 55 cents. But in December 2011, it was paying 57 cents a quarter. In September 2011, it was paying 60 cents a quarter. See a trend? In fact, NLY was paying a hefty 75 cents in 2009. It’s been seeing payouts fade ever since. Here’s the history for anyone curious

YEAR	Q1	Q2	Q3	Q4
2012	55 cents	55 cents
2011	62 cents	65 cents	60 cents	57 cents
2010	65 cents	68 cents	68 cents	64 cents
2009	50 cents	60 cents	69 cents	75 cents
2008	48 cents	55 cents	55 cents	50 cents

The share price hasn’t budged much since 2009, and you may be inclined to say a roughly 13% annual return is nothing to sneeze at. Of course, the Dow Jones Industrials average is up about 35% since Annaly paid that juicy 75-cent dividend. And the trend of payments is clearly down.

What Drives Down mREIT Dividends?

So what gives? The housing market seems to be holding up nicely, and interest rates remain at or near record lows. Why would a company like Annaly be suffering, and why have almost all mREITs — including American Capital Agency (), Armour Residential (NYSE:ARR), Invesco Mortgage Capital (NYSE:IVR), Anworth Mortgage Asset (NYSE:ANH) and others — seen declining yields over the last few years?

Well, the spread is key. And thanks to central bank policy, including Operation Twist, the long-term yield curve has been pushed lower, and that has suppressed the return that many mREITs can make on their investments. Lower returns for these stocks means lower dividends, since their distributions are tied firmly to their profits. Remember, they still have to follow the REIT rule that 90% of taxable income gets returned to shareholders.

Conventional REITs like Public Storage or Rayonier don’t have extreme volatility in dividends because they don’t have extreme volatility in profits. They are sleepy, bedrock businesses that for the most part can rely on a predictable trend from quarter to quarter.

Are mREITs a Good Buy?

If you’re looking for reliability in dividends, by all means seek out REITs — but avoid the volatility in mortgage-focused real estate investment trusts. They don’t fit with your goals.

If you don’t need the dividends as income and are willing to stomach some volatility, however, mREITs may not be bad. In a sideways market you could do much worse than a 13% dividend, even if the payouts decay over time to “only” 8% or 9% of your cost basis.

Just keep in mind the all-important opportunity cost of investing, however. As I outlined with Annaly Capital, a 13% annual return in 2010 wasn’t too shabby — but you would have done better simply buying the market.

If you tie up your cash in these big dividend players, you’ll have to hold them for the entire year to get that headline yield, and that means keeping your money parked in mREITs instead of investing it elsewhere.

That’s a wise move if you have no other options. But if there’s a big bull market and you sit it out waiting for your dividends, you may be kicking yourself.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the stocks named here.