Can Your Retirement Portfolio Handle A Position In An mREIT Stock?

| About: Annaly Capital (NLY)

Since our position has changed a bit on some stocks in the mREIT sector, the question now becomes whether or not your own retirement portfolio can handle a position in one of them?

While I noted that it would be a good time to buy Annaly (NYSE:NLY) in this previous article, I did not specifically suggest that the stock be added to our Team Alpha Retirement Portfolio, when I dumped Cisco (NASDAQ:CSCO) from the Team Alpha Growth And Income Portfolio. The reason is that too many folks fall in love with these high yielders, and fail to face the complexities, headwinds and drawbacks, for the sake of the dividend. Failure to look at the total return can defeat the purpose of dividend opportunity stocks.

It is also the main reason why I have changed course on the sector so often, specifically on my favorite best of breed in the sector, Annaly Capital.

Portfolio Management Is Just As Important As Stock Selection

When we evaluate certain stocks for various financial goals, the stock we select to research is just part of the puzzle. We need to look at the trends in the sector, the political environment, interest rates, as well as the fundamentals of the company itself.

If circumstances have changed enough for us to consider adding NLY to our retirement portfolio, then we need to check our risk tolerance because this particular sector can be confusing. That being said, if you had followed my own actions from the previous article, here is where you would be:

NLY Chart

NLY data by YCharts

This goes beyond market timing which many folks would accuse me of, but if you were following my articles, you would know that I was watching the correlation of the Fed tapering to the share price, and the speed of the interest rates rising relative to the price of NLY as well. Since tapering has begun, the interest rates have risen rather slowly. That means we have a more stable, and suitable environment for the mREIT sector. Especially for a conservative company like Annaly.

The Fed went one step further the other day by Bernanke stating that policies will be accommodating and flexible. To me this is also a positive. Just as keeping ZIRP in place for another two years is (zero interest rate policy).

NLY Chart

NLY data by YCharts

By overlaying the rather tepid move in the 10 year treasury to the rise in the share price of NLY since tapering became official, the correlation speaks for itself. As it does, we now can place more positive meaning to the price to book valuation which is at a 20% discount.

Even the FFO (funds from operations) metrics are headed in the right direction:

Note the change from 2011 to 2012, and 2013 should be more positive now (as well as going forward in 2014).

The Bottom Line

I would never "back up the truck" with any of these stocks, but given that the dividend is now at $.30/share for this quarter, and I believe for the next few quarters at least, an 11-12% dividend yield can add some juice to a well allocated dividend income portfolio like Team Alpha Retirement Portfolio. As of today I am taking the money from the portfolio cash reserves, and redeploying it into NLY with a purchase of 200 shares.

An allocation of less than 2% in a well balanced portfolio can endure the ups and downs in NLY, and now that the clouds have cleared somewhat, the rewards could be more than the risks.

Disclaimer: The opinions of the author are not recommendations to either buy or sell any security. Please remember to do your own research prior to making any investment decision.

Disclosure: I am long NLY, CSCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.