Author: Mark Holder, Stone Fox Capital
Covestor model: Net Payout Yields
Disclosure: Long NLY
Annaly Capital (NLY) continues to support one of the highest dividend yields of the large cap ($10B+) stocks. Combine the huge 13% dividend with a small stock issuance and the net payout yield (NPY) drops a bit to 12.5%.
Annaly manages assets on behalf of institutional and individual investors worldwide. The Company's principal business objective is to generate net income for distribution to investors from its investment securities and from dividends it receives from its subsidiaries. Annaly is a Maryland corporation that has elected to be taxed as a real estate investment trust ("REIT").
Most investors probably aren't aware that even this high 12.5% net payout yield doesn't place Annaly in the top 10 NPY stocks for July. See list here. In order to make that list, a stock needs to yield 15% from the combination of dividends and net buybacks.
That dividend yield, though, easily smashes the next largest NPY dividend yields such as ConocoPhillips (COP), Lorillard (LO), and Lockheed Martin (LMT) that don't even reach 5%.
Naturally investors can invest directly in AT&T (T) or Reynolds American (RAI) that surpass the dividend yields of those companies, but these companies don't have buyback support to place the stocks in the top NPY list.
The biggest complaint with the NPY concept is that the buyback portion is much higher than the dividend. In that case, an investor can combine Annaly Capital and the above three NPY stocks and an investor could achieve a 7% dividend yield with a total NPY in the 14-15% range. Not too shabby.
In the case of a mREIT like Annaly, the market is signaling the undervaluation by allowing the net payout yield to be so high at 13%. Though the requirement of an mREIT is that the company distributes 90% of income, so management isn't in a position to signal relative valuation.
This makes Annaly a unique situation, but one I believe is worth including in a model of 20 or stocks in order to capture and increase the dividend exposure.
The risk with mREITs are well known and documented. See this article from Regarded Solutions regarding the sector and specifically this stock.
In general, a stable and steady interest rate environment is ideal for this stock. Annaly can borrow short term and lend long term and collect the spread.
A lot of fear exists that interest rates will rise too fast or the spread will narrow and dramatically impact the sums earned by Annaly. Who is the market trying to kid? The spread is unlikely to narrow much further and the initial rate move should be towards higher long term rates and a wider spread.
The Fed isn't likely to raise rates prior to the market, so until long term rates rise I believe this risk should be limited. Recently Annaly has been paying a quarterly dividend of $0.55, but just last year the rate averaged over $0.60 and it was $0.68 when the spread was higher in late 2010.
No matter what happens with interest rates, the goal of the NPY concept is to buy the highest yielding stocks and let the market tell the investor when to sell. Leave all the worrying to everybody else.
My portfolio is designed to specifically allow the qualified management teams - and not the investor - to worry about the economy and interest rate spreads.
In any such portfolio, I believe Annaly Capital should be a core holding.