Annaly Now Even Stronger On Fed's New QE Program
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the past couple of years, due in large part to historically low interest rates, investors in REITs have been able to take advantage of the win-win situation that has resulted from high dividend yields and increasing share prices. This has resulted in the stock price of some REITs to surge over 20% this year alone. In this article, I will discuss why, with its dividend yield near 13%, Annaly Capital Management (NYSE: NLY) will remain a winner for investors seeking both income and growth over the short and long-term.
What does QE3 mean for REITs?
Overall, the REIT sector is poised to continue rewarding investors. In some ways, the Federal Reserve has endorsed this industry with the latest round of quantitative easing (QE3). For example, the Fed's long-term interest rate targets offer an ideal situation for REITs, which could in turn provide a solid income to their investors.
Under the latest quantitative easing plan, the Fed intends to purchase approximately $85 billion in mortgage backed bonds on a monthly basis throughout the remainder of 2012, and then $40 billion per month throughout 2013, that will increase the demand for agency mortgage backed securities - and in turn, likely driving an increase in the price of the securities that are held in Annaly's portfolio. Certainly, this should also raise the book value of Annaly's portfolio as a whole.
Why Annaly over other Profitable REITs?
While other REITs are likely to perform well, too, Annaly has some distinct advantages - one being that it is the largest REIT on the market, with a total enterprise value of more than $114 billion. Anally also has a strong management team that has experience in nearly every type of interest rate scenario. And along the way, Annaly has continued to steadily pay dividends to its investors.
That being said, Annaly does plan to cut its dividend, beginning in the third quarter of 2012. But it’s doing so in order to protect the company's assets. Even with a dividend cut, Annaly is still very well positioned during what could continue to be uncertain times. The money Annaly will keep within the company coffers should also help it take action on future opportunities as they come along. In addition, while some analysts have downgraded the company's shares, they’ve done so primarily due to Annaly's potential exposure to higher prepayments based on the size of the REIT’s overall portfolio.
Although Annaly's competitor American Capital Agency (NASDAQ: AGNC) actually has a better dividend than Annaly (14% dividend yield), this company has also had to utilize roughly 30% more leverage (7.5:1 versus 6:1) in order to do so. This could prove to be dangerous should there be an unexpected rise in interest rates.
Certainly, other REITs such as Two Harbors Investment (NYSE: TWO) could also provide a nice income for investors as well. Two Harbors offers a solid dividend yield of just over 12% - even after a recent dividend cut. This still keeps the yield above that of 10-year treasury bonds, while allowing Two Harbors to generate more than enough operating cash to sustain its new dividend rate for the long term.
Two Harbors has a somewhat diversified asset portfolio that includes a mix of fixed and adjustable rate securities, as well as both agency and non-agency mortgage backed securities. In addition, the REIT uses an alternative investment focus whereby it purchases properties - primarily homes that have been foreclosed and are then rented out for the purpose of generating income. Shares of Two Harbors are currently trading at a premium of 20% to book value.
Another REIT that is paying a premium dividend is New York Mortgage Trust (NASDAQ: NYMT). This REIT also stands to gain from the Fed's new QE3 program - especially because, unlike most mortgage backed security REITs, NY Mortgage Trust specializes in a more diversified group of investments that include multi-family CMBS. This gives the company a wider portfolio spread than the typical 1.5% to 2.7% many of the firm’s competitors operate with. Recently NY Mortgage Trust obtained close to a 6% spread during the second quarter 2012, although it also had a higher than normal prepayment rate.
One REIT that has endured some real struggles of late is Chimera Investments (NYSE: CIM). While in the recent past the company's shareholders were rewarded with a dividend yield in the 20% range, these days it has fallen closer to 18%. And while that is still a respectable number, investors should be very concerned by the company's announcement that it will be restating its financials all the way back to 2008.
In addition, Chimera has also recently announced that it received a 4-month extension in order to even stay listed on the NYSE. In this case, if the company doesn't comply and file its 2011 10-K by Jan. 15, 2013, there is the possibility that the REIT will be delisted.
The Bottom Line
Between the Federal Reserve's current policy initiative, which has created a low long-term interest rate target, REITs are in an ideal position to benefit from both an increase in demand and a larger amount of capital with which to purchase additional securities.
REIT shareholders overall should expect to continue receiving significant income via solid dividend yields. Annaly in particular is well positioned for any type of market - but especially one that is boosted by continued Fed QE3 program.
With the solid dividend, along with 3-year annualized returns of approximately 18%, I feel that Annaly will keep rewarding its shareholders with both income and share growth over the long-term.
Dig Deeper
Annaly Capital Management has a history of paying huge dividends to shareholders, made possible by borrowing at cheap short term rates and investing in longer term mortgage securities. But there are some things investors absolutely must know about Annaly’s business before buying the stock. In this brand new premium research report on the company, a Fool analyst runs through the dynamics of Annaly’s business, as well as the future opportunities and pitfalls of their strategy. Click here now to claim your copy.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
