Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC): REITs Are a Good Idea for at Least Two Years

Page 1 of 2

There is a lot of justified fear concerning REITs. Mortgage REITs make money by using the spread between short-term debt and long-term debt. The fear for REITs stems from concerns of a change in the interest rate and continued easing pushing the interest rate spreads even lower. The Fed has been buying up mortgage-backed securities, increasing their price and lowering yields. That makes it hard for mortgage REITs to make money despite low short-term rates.

Regarding the low short-term interest rate, I give it at least two years before we see interest rates significantly higher. This is just based on the slowness of economic recovery and growth, and the soft labor market. Despite the flood of money from the Federal Reserve, inflation has not become an issue, yet. If we see interest rates rise significantly before 2015, then oops. You’ll have a warning one way or the other and you can exit your positions, because the rate will not rise to 4% overnight. It is likely to be incremental.

Still one of the best in its class

Annaly Capital (NLY)I might be boasting a bit too much on behalf of Annaly Capital Management, Inc. (NYSE:NLY), but I do think it is one of the best REITs to own. It is the one I am most familiar with, so take that into account because it puts some nice color on my opinion. When I started following Annaly, it was at $17-$18 a share. It is a bummer to see it at $15.50, but whatever position I used to have was closed when some covered calls got assigned. The decline in price has boosted the dividend yield to 11.60%.

You are looking for Annaly Capital Management, Inc. (NYSE:NLY) as a dividend stock, but over the last two years, the dividend has drifted downwards. This is due to a lot of factors that require an understanding of the complex business that a mortgage REIT operates. This is not a primer on that business. The company is to be liked for its overall stability and efforts to diversify itself. It is working on acquiring the rest of Crexus Investment Corp (NYSE:CXS) that Annaly Capital Management, Inc. (NYSE:NLY) does not already own. The negatives of the company stem from broader factors, not problems of the company itself.

You might consider a medium-term strategy that is active compared to traditional dividend investments. The aim is to collect the dividends, and to write covered calls to boost that amount. The lack of volatility will keep premiums low. If you end up being assigned in May, you want the move from the current mid-$15 range to $16 to give an adequate return. Therefore, this strategy is really only suited to someone with a large enough portfolio, so that they can own a lot of shares without overextending themselves.

Annaly’s diversity bid

Fundamental currents might warrant a standard long investment, if you believe that the company’s steps toward diversity will make it stronger. Annaly Capital Management, Inc. (NYSE:NLY) buys mortgage securities backed by Fannie Mae and Freddie Mac, referred to as agency securities. CreXus is a REIT that specializes in commercial paper, and that shot of diversity can be just what Annaly needs to stop its declining dividend.

To pay part of its dividend, Annaly has had to sell its securities at a gain. Rising prices on the securities depress yields. This is a less ideal situation than collecting returns off those securities to pay for the dividend. It would be like you are selling a stock to generate investment portfolio gains, because the companies in your portfolio are offering smaller dividends. That is a temporary fix until you are out of securities with gains to sell.

Adding CreXus to get into commercial paper is a good idea. It won’t even be that risky if the company sticks to investment grade paper. Annaly Capital Management, Inc. (NYSE:NLY) has been conservative in the past, so I assume it will remain that way.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!