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Long-term horizon, REITs, biotech, research analyst
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Summary

  • Over the last 17 years, investing in mREITs like NLY or AGNC has bought more dividend income than other dividend contenders, like O, JNJ, KO, or PTTRX.
  • Although annual incomes from NLY and AGNC bounce around a lot, they do so at levels always higher than other contenders for the dividend championship.
  • For the long-term buy-and-hold investor, NLY and AGNC provide consistent high, higher, and highest income. Like bonds, price volatility is secondary if you don't sell.

Which stock is a dividend champion? What metrics should we use to anoint the champion? Dividend growth rate? Longest run of consecutive dividends without a cut? To me the most important criterion is how much income I receive from my investment. Although total return (i.e., dividends + price appreciation) is important, as a long-term investor I am hoping to just buy-and-hold, cash those monthly (quarterly) dividend checks, and sleep well at night blissfully ignoring the gyrations of the market. What I aim to show you is that far and away the dividend champions are found among the mortgage REITs (mREITs). It's not even close comparing mREITs like Annaly Capital Management (NYSE:NLY) and American Capital Agency (NASDAQ:AGNC) to "dividend champions" perennially on everyone's top ten list like Johnson & Johnson (NYSE:JNJ) and Coca-Cola (NYSE:KO), or to equity REITs like Realty Income (NYSE:O) ("The Monthly Dividend Company"), or even to bonds - e.g., PIMCO Total Return Fund (PTTRX). Over the last 17 years, for each and every year, had you invested in NLY your money would have bought you more monthly income than from any of those other contenders (the story is the same for AGNC since it started trading publicly in 2008).

How much income does your money buy?

To calculate how much income an investment buys (let's say $10,000), I added up all the dividends issued from the date of purchase to the end of 2013. Since we mostly think of our income as a monthly figure, I took that total and spread it out evenly over all the months between the date of purchase and now. Please note, therefore, that in the forthcoming chart the "monthly" income is an average - not an actual monthly income, which could be higher or lower depending upon the actual dividend for that month. I know that we don't live by averages, and I will show in a later section what actual monthly incomes are for the various investments. But for now, using average monthly numbers to present how much dividend income an investment buys is a useful way to compare the different choices we have for our investment dollars. It allows me to graphically show you the answer to the question: at any time between 17 years ago and today, how much income would I have earned if I had made a one-time investment of $10,000? Since dividends are issued on a per share basis, income also depends on how many shares $10K buys, not only on the dividend rate. Figure 1 then shows the average monthly income $10K buys depending on when that investment was made. I'll first show you the data for NLY. In Figure 2, I compare NLY to the other dividend contenders.

The first thing to note in Figure 1 is that the average monthly income never fell below $50. Indeed, for most of the time between 1997 and 2013, purchasing $10K worth of NLY provided income closer to $100 per month. NLY first publicly traded in 1997; an income investor getting in on the ground floor would have done particularly well - over $200 per month. In Figure 1, I also plot the price per share of NLY over that time period. As you might expect, buying when NLY dips (crashes?) locks in higher future income since $10K buys more shares. Only time will tell whether that will happen again after the most recent correction in 2013 (a fall of nearly 40% in the share price).

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Figure 2 compares NLY to JNJ, O, and PTTRX, the world's largest bond fund and a useful yardstick for income from the fixed income space. Again, I am showing how much average monthly income $10K buys. I have also analyzed KO, another dividend favorite, but the data is not much different from JNJ. Likewise, AGNC, another mREIT, is much like NLY but since its track record is much shorter (2008-2013) I omitted it from the graph. All data has been adjusted for stock splits.

What immediately stands out in stark relief is how much more income $10K buys when invested in NLY compared to any of the other choices. At no time between 1997 and the end of 2013 did those other contenders provide more future dividend income than NLY. JNJ and PTTRX provided nice steady dividends but at all times those dividends were 2-3 times lower than NLY's. O did better but again failed to rise to the level of NLY (or for that matter AGNC in the 2008-2013 period, data not shown). So, what's not to like about NLY?

Volatility in actual monthly incomes

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As all investors know, there is no free lunch. The higher dividend income that NLY provides comes with a price: the actual income from an investment in NLY varies quite a bit. Figure 3 shows actual annual incomes from an investment of $10K made on Jan 2, 2001 in NLY versus JNJ, O, and PTTRX. I chose that date because by then the average future monthly income from NLY had mostly settled down from its initial surge (see Figure 1). But note that picking any other date for comparison wouldn't change the variation picture - it would just move up or down the baseline around which that variation occurs. As Figure 3 shows annual incomes from $10K invested in NLY on 1/2/2001 varied nearly 5-fold (!) between 2001 and 2013: from a high of $2500 for 2001 to a low of $533 for 2006. JNJ, O, and PTTRX provided much more stable incomes - but always at levels lower than NLY, except one time for O during NLY’s nadir in 2006. Remember from Figure 2 that at all times between 1997 and 2013 an investment in NLY (and in AGNC since 2008) provided more future income on average than any of the other contenders. Figure 3 shows it is only a matter of how much more, not a case of some years when NLY grossly underperforms the other contenders (pretenders?) while over-performing in other years. Although gyration in income can be unsettling, I'll take it if I know that I am consistently beating the competition.

Concluding remarks

I am simply an investor nearing retirement trying to figure out the best place to park my retirement savings so as to earn a halfway decent income. My analysis seems to say that the mREIT sector (NLY, AGNC) provides the best opportunity to earn high income relative to other dividend contenders (JNJ, KO, O, and PTTRX). The price volatility of mREITs like NLY and AGNC poses other kinds of risks, of particular concern were I ever to be forced to sell those stocks during bad times. But that is a discussion for another day. In terms of a buy-and-hold investment that provides income, NLY and AGNC appear to be true Dividend Champions. The uncertainty is whether they can hold onto their championship status in a rising interest rate environment, which appears to be in the cards. Since the business model of an mREIT depends heavily on the spread between short-term and long-term interest rates, we may be in for rough waters ahead. It is probably fair to say that my retrospective analysis to identify dividend champions is a prime example of the aphorism that past performance does not guarantee future results.

Source: mREITs Are The True Dividend Champions, And Safer Than You May Think