Annaly Capital carries risk, but reward looks promising
If you’re in the market for a solid dividend payer, consider Annaly Capital Management (NYSE: NLY), which recently sported a yield of 13 percent.
Annaly is a mortgage REIT (real estate investment trust), profiting from the difference between the rate at which it borrows, which is currently near a record low, and the rate at which it relends.
Like its peers, which also invest in mortgages, it enhances its returns by working with borrowed money. That carries some risk, since rapidly rising interest rates can throw a wrench into the process.
One attractive feature of Annaly is that it’s been reducing its debt. That can dampen the dividend it pays its shareholders, but probably not by a lot. The company’s free cash flow generation has been strong.
Annaly and its peers may be less compelling when interest rates rise, but the Federal Reserve has said that it expects to keep rates low at least through most of 2014. Thus, a few more years of double-digit dividend yields seem quite possible, though they’re far from guaranteed.
Annaly doesn’t fit the typical mold of dividend stocks, as it doesn’t have set payouts. They can rise and fall from quarter to quarter. Still, it does have a history of outperforming inflation and appears to be a safer mortgage REIT than most of its peers.
Ask the Fool
Q: What’s wrong with buying overvalued stock in a great company, as long as the price eventually rises? – S.L., Bradenton, Fla.
A: It may not rise. You’re right to think of the long run, but the price you buy at matters, too.
Imagine McDonald Farms Inc. (ticker: EIEIO), trading at $10 per share. If it’s expected to grow at 12 percent per year for the next 10 years, it should trade around $31 per share in a decade.
If you buy it at $10 per share, your total gain over the decade will be 210 percent. However, if you have to pay $15 per share for it now, it will return only a total of 107 percent on its way to $31. That’s about 7.6 percent per year.
Worse still would be buying it at $20 per share. Sure, you’d make money, but your total gain would be just 55 percent, or roughly 4.5 percent annually.
Making matters worse, EIEIO might not perform as well as expected. Buying at steep prices offers little margin of safety.
My dumbest investment
Growing up, I witnessed my dad’s great success as an investment banker and knew friends came to him for investment advice. More than 30 years ago, when I was in my late 20s, I begged him for a stock tip. He resisted – strongly – as he didn’t want to be responsible if it didn’t work out. But he finally gave in.
The company he recommended was Sambo’s. My first-ever stock purchase was 100 shares at $4 per share. It wasn’t long after that purchase that the company went bust. My dad had lots of personal stock-investing success – outside of the Sambo’s mistake. K.S., Register, Ga.
The Fool responds: Your successful dad is a perfect example of a seasoned investor – they all have both winners and losers in their portfolio’s past. The key is simply to keep learning, from your mistakes as well as from books and smarter investors, so that your winners more than make up for your losers. It’s fine to get tips from others, but always do your own research too, so that you make your own informed decision.