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Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC): Stocks for the Dividend Investor, Part 2; High Yield

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In part one of this series I looked at some solid dividend paying stocks with a rich history that will provide a solid backbone to any portfolio. In this part I am going to look at the high yielding dividend stocks that offer above average returns but significantly higher risk.

Annaly Capital Management, Inc. (NYSE:NLY)

High yield comes with high risk by its very nature, and with the whole market bouncing around new highs every day dividend yields are being pushed to new lows, driving investors into higher risk assets that offer a higher yield.

The most popular of these high risk/high yield assets are mREITs, which use high levels of leverage to achieve high returns. I believe the best companies in the high yield mREIT sector are Annaly Capital Management, Inc. (NYSE:NLY), currently yielding 12.5%, and American Capital Agency Corp. (NASDAQ:AGNC)., currently yielding 18%.

Why are payouts so high?

I have written about how these mREITs manage to achieve such high yields many times before, so I wont go into to much detail here.

However, in summary, the payouts are so high because these mREITs rely on high levels of leverage or borrowing, usually through a repurchase agreement, which then allows the company to buy mortgage backed securities with up to 50% leverage. This high level of leverage gives the company a relatively high level of income per share, which it then distributes to shareholders, resulting in a high yield. A more in-depth run-down can be found here.

Are these high payouts secure?

Yes and no. The majority of these mREITs purchase agency mortgage securities, which are supposed to be high quality, and low credit risk. That said, the yields on these assets have fallen recently as the Federal Reserve purchases $85 billion in bonds per month, raising prices and depressing yields. This has forced these mREITs to look elsewhere for yield, namely lower credit-quality mortgage-backed securities, which offer a higher yield but with more credit risk. These higher risk assets are only limited to small sections of mREIT portfolio’s.

In respect to shareholder payouts, I believe these are set to continue falling as the Fed’s asset purchase program continues to drive down yields. Having said that, as I discuss below, shareholder payouts could be in for a boost in the future when the Fed starts to taper asset purchases.

What about Total Return?

As I say above, I believe that shareholder payouts from these two companies are set to continue falling as they have done during the past year, which will obviously depress share prices.

However, thanks to their high dividend payouts, despite falling share prices, investors in both Annaly Capital Management, Inc. (NYSE:NLY) and American Capital Agency Corp. (NASDAQ:AGNC) have seen their total return equal or beat that of the S&P 500.

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