Don’t Sacrifice Safety for Income: Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC) and More

Page 1 of 2

Conservative investors are in a very uncomfortable position right now, as their regular sources of portfolio income have seen their payouts slashed in recent years.

Yet before you go ramping up the risk level of your portfolio just to make ends meet, you really need to consider whether doing so won’t just trade one problem for a potentially much larger one that could put your entire life savings at risk.

Annaly Capital Management, Inc. (NYSE:NLY)

The income dilemma
The huge problem that many conservative investors face is that the investments they’ve traditionally relied on to provide the income they need have essentially dried up. Even prudent investors who wisely prepared bond and CD ladders to take advantage of higher interest rates in the past have steadily seen their income fall, as old CDs yielding 5% or 6% get replaced with new ones that pay only 1% or 2%.

In response, those desperate for income have piled into asset classes that involve very different types of risk. Lower-grade corporate and municipal bonds offer higher payouts than other bonds, but they also carry with them much weaker credit ratings and significantly greater chances of losses from default. Many investors have also started to give up on bonds, moving money into the stock market.

In particular, some highly specialized segments of the market have attracted a lot of attention:

1). In the natural resources space, master limited partnerships have drawn interest because of their sizable distribution yields and favorable tax characteristics. Yet ALPS Alerian MLP ETF and the MLPs that make up the fund’s holdings have returns that are highly dependent on conditions in the oil and gas industry, leaving many investors dangerously concentrated in that area.

2). Real estate investment trusts offer some of the highest yields in the market, and floods of money have poured into REITs, especially those specializing in mortgage-backed securities. Annaly Capital Management, Inc. (NLY)American Capital Agency Corp. (NASDAQ:AGNC) , and other major players in the mortgage REIT market have seen their market capitalizations soar as successive secondary offerings and high levels of leverage have greatly boosted the size of their balance sheets. Yet even having taken steps to hedge some interest rate risk through the use of derivatives, mortgage REITs are still vulnerable to any adverse conditions that threaten their ability to gain access to leverage.

There’s nothing inherently bad about any of these investments. The problem, though, is that they’re a far cry from the bonds and CDs that their new investors are used to, and without a complete understanding of what they’ve gotten themselves into, conservative investors won’t know what to expect from them or the potential problems that may arise with them.

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

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

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!