No need to ignore mREITs
I still like Annaly Capital Management, Inc. (NYSE:NLY), but am not blind to its risks. I still think that interest rate and quantitative easing risk will only make themselves felt over time. Interest rates will rise slowly, and that could mean an increase in the spread between long-term and short-term interest rates that Annaly Capital Management, Inc. (NYSE:NLY) uses to make its money.
The risk comes from the decline in book value for Annaly Capital Management, Inc. (NYSE:NLY)’s existing assets as interest rates rise. That is the trade-off. The value of existing assets falls, but there is more opportunity to make money. Annaly Capital Management, Inc. (NYSE:NLY) is a dividend investment, so more income is better in my opinion. There is a risk to the share price, so it does not make sense to go in heavy, because there is a chance to get shares cheaper.
Annaly Capital Management, Inc. (NYSE:NLY) has made an effort to lower its expenses by moving to external management. It also uses less leverage than some of its peers. The 13%+ dividend is the big draw, but that yield is buoyed by a falling share price. The dividend’s absolute value has fallen over the last few years. Falling spreads and the company using less leverage are the causes.
The company is not in the red, and most of the fear is whether there are better places to park your money. I see no reason Annaly can’t benefit from interest rates rising slowly, considering the spreads have been under pressure for so long. It would be great to get this at $10 or less, but even at current levels, it could warrant an investment if it fits your portfolio and risk profile.
Conclusion
There are a lot of dividend investments out there, so I would have thought mREITs were enough. Annaly has had quite a few problems, though if it is cheap enough, I would still jump into it. Those problems require some REIT diversity, and I would be far more comfortable holding Senior Housing long-term. It seems like less of a headache than Annaly Capital Management, Inc. (NYSE:NLY), since you do not have to watch for interest rates and their push-pull effects on book value and income.
Hospitality Properties Trust (NYSE:HPT) might be one to consider if you need even more diversity, but I am fine passing on that one. The rising dividend of Senior Housing Properties Trust (NYSE:SNH) seems like a better draw than splitting a position with Hospitality Properties.
The article Diversify Your Exposure to REITs originally appeared on Fool.com and is written by Nihar Patel.
Nihar Patel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Nihar is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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