We have to admit that Annaly Capital Management (NLY) is one of our favorites. This is a company that has been paying above-average dividends for 25 years, recalls Todd Shaver, editor of The Bull Market Report.
And when we say above average, we don’t mean 4% or 5%. This stock has been paying 8% and 9% and 10% for decades. During a few years in the early aughts, the stock paid over 13%.
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How do they do it? They’re very smart. Very smart. Wellington J. Denahan co-founded the company with Michael Farrell in 1996 and has served as Vice Chairman of the Board since that time. She is only 57 years old and we can only hope that she stays around for another 10-15 years.
The founders have seen bull markets and bear seasons, high interest rates and low ones, and have survived and thrived all these years.
What do they do? They take their capital, borrow against it to the tune of 5X leverage and invest the proceeds in U.S. Government obligations of Fannie Mae, Freddie Mac and Ginnie Mae securities.
They pledge the assets as collateral (backed by the full faith and credit of the U.S. Government) and borrow at very low short-term rates. Their investments pay out much higher rates and the leverage allows them to make 12-15% a year on their capital.
Is there risk involved here? Of course. Can you name a company that doesn’t have risk? The risk is in the short side of the yield curve: the 1- to 2-year rates. If short rates were to shoot up in a brief period of time, it could have a negative impact here.
At the moment, the Fed has promised that we will see short rates very low for years to come. Annaly management couldn’t be happier. Nor could we.
One more thing. The stock is non-correlated to the U.S. stock market. What we mean by that is that if the market goes up or if it goes down (bull or bear markets), it has no bearing on the company nor the price of the stock.
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Why? Because of what we just covered above: the company is all dependent on interest rates and a normal sloping yield curve.
If the curve flattens or inverts, this could cause problems for the company. But we trust that management will be right on top of things and work out the kinks and be able to keep paying out 90% of their income (they are a REIT) at higher than normal rates. Our target is $11.
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