Friday, February 26, 2010

NLY, a Dividend Paying Trust Worth A Look.

With chatter about a bubble in bonds building, it may be a good time to look for alternative sources of investment income. One such source has long been dividend paying stocks, trusts and partnerships. Here are two such dividend plays - one is a Real Estate Investment Trust, and the other is an energy partnership.

Annaly Capital Management, Inc. (NLY)


Annaly Capital Management is a mortgage REIT (real estate investment trust), and as such the company is not subject to federal corporate income tax, provided it distributes at least 90% of its taxable income to its stockholders in the form of dividends. NOTE: The income generated by a REIT may be taxable at your income tax rate, and not at the capital gains rate. So check with your tax advisor if this is a point of concern.



What makes NLY attractive.


One of the things that makes Annaly Capital attractive is its low debt level compared to other REITs and owners of Mortgage Backed Securities (MBS). For example, Commercial banks are typically leveraged 30:1; thrifts - 25:1; hedge funds - 20-30:1; and Annaly - 8-12:1, or less than half that of a typical thrift.

Another thing is that the MBS that Annaly Capital invests in are backed by agencies of the U.S. government like Ginnie Mae, Fannie Mae and Freddie Mac. While these agencies are essentially bankrupt, the government is not likely to let them fail so they have a de-facto credit rating of AAA.

NLY dividend history.


NLY has increased its dividend from about $2.20 per share in 2008 to $2.4 in 2009, while the yield has declined from 16.6% to 13.4% as the price has risen. At the time of this post, NLY was yielding 16.80%, or $3 per share annually.

How safe is NLY dividend?


At first glance, there's a lot of scary stuff to be seen in the summary of Annaly. After all, it was imploding Mortgage Backed Securities that began the current recession and market crash of 2008-2009. And Annaly is using leverage to purchase these securities, leverage which magnifies gains AND losses alike.

But upon further inspection, the credit risk for Annaly seems low because the MBS that it invests in are backed by the U.S. government and, as mentioned above, their leverage rate is lower than the industry average.

What can affect its performance (and dividend) is a major swing in interest rates. This is largely because of its use of leverage, or borrowing, to magnify its returns. But if management can keep ahead of rate trends it can limit the squeeze that variable interest rate MBS put on Annaly's profits.

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