What The Dividend Really Means For Annaly

| About: Annaly Capital (NLY)

Summary

I offer a simple lesson in buying on dips, timing your buys and patience.

Using some hypothetical calculations, I demonstrate why this is a long-term holding.

The short-term pain is real, but longer term this name makes a strong key addition to a portfolio.

Annaly Capital Management (NYSE:NLY) remains one of my core mREIT holdings and has traded nicely since I called what I thought as the bottom in the stock since January 2014 when it was trading at $9.75. Now the stock has traded below this mark a few times, but has been trading for the most part at or above $10 over the last two and a half years. Of course, many shareholders are still feeling the pain, particularly those who bought in prior to this call. In names like Annaly, which I contend are to be bought for income, your entry point does make a difference. I have been in the stock since 2009. The second thing you need to realize is that NLY is just one of several high yielding stocks that I own, and you should be diversified across sectors and across types of holdings (i.e., some high income, some dividend growth, some growth, some bonds, etc.). My personal taste is about 20% in high yield and within that allocation, you have to mix it up. Annaly and other high yield names have taken a big hit in the least two days.

The chorus of "short calls" and folks screaming for a "sell" has erupted once again. How soon we forget why we buy these names. The day-to-day means nothing. As for Annaly, investments in this name are long term. You really should plan to hold these for a decade or more. This is because it allows time to compound effectively, and second, if you are collecting income, it gives you a chance to recoup most if not all of your investment in the form of dividends. So many have forgotten this simple but true fact. Eventually, you are playing with the houses money. A growth name that plummets back to your entry point will result in no gains. Thus, I want to reiterate why we buy Annaly. It is for the dividend, and a dividend history along with four imaginary buyers is shown in table 1.

Table 1. Annaly Capital's Dividend History Since The Start Of The 21st Century And Four Hypothetical, Single Buy And Hold Investors

Ex-Dividend Date

Dividend Paid Date

Dividend Amount ($)

Total Paid ($)

Buy Point

Share Price

12/29/1999

1/28/2000

0.35

0.35

Buyer 1- 12/13/99

$8.51

4/3/2000

5/29/2000

0.35

0.70

6/29/2000

7/28/2000

0.30

1.00

10/5/2000

10/30/2000

0.25

1.25

12/27/2000

1/29/2001

0.25

1.50

4/3/2001

5/29/2001

0.30

1.80

7/2/2001

7/30/2001

0.40

2.20

10/3/2001

11/29/2001

0.45

2.65

12/27/2001

1/29/2002

0.60

3.25

4/3/2002

5/29/2002

0.63

3.88

7/1/2002

7/29/2002

0.68

4.56

10/1/2002

10/29/2002

0.68

5.24

12/27/2002

1/29/2003

0.68

5.92

3/27/2003

4/30/2003

0.60

6.52

6/30/2003

7/31/2003

0.60

7.12

10/1/2003

10/29/2003

0.28

7.40

12/24/2003

1/28/2004

0.47

7.87

3/29/2004

4/28/2004

0.50

8.37

6/30/2004

7/28/2004

0.48

8.85

9/28/2004

10/27/2004

0.50

9.35

12/29/2004

1/27/2005

0.50

9.85

3/30/2005

4/27/2005

0.45

10.30

6/28/2005

7/28/2005

0.36

10.66

9/26/2005

10/27/2005

0.13

10.79

Buyer 2-9/18/2005

$12.80

12/28/2005

1/27/2006

0.10

10.89

3/29/2006

4/27/2006

0.11

11.00

6/28/2006

7/27/2006

0.13

11.13

9/27/2006

10/27/2006

0.14

11.27

12/27/2006

1/26/2007

0.19

11.46

3/29/2007

4/26/2007

0.20

11.66

6/28/2007

7/27/2007

0.24

11.90

9/27/2007

10/29/2007

0.26

12.16

12/27/2007

1/28/2008

0.34

12.50

3/26/2008

4/29/2008

0.48

12.98

6/25/2008

7/29/2008

0.55

13.53

9/16/2008

10/29/2008

0.55

14.08

12/26/2008

1/29/2009

0.50

14.58

3/26/2009

4/29/2009

0.50

15.08

6/25/2009

7/29/2009

0.60

15.68

9/29/2009

10/29/2009

0.69

16.37

12/24/2009

1/28/2010

0.75

17.12

3/30/2010

4/28/2010

0.65

17.77

6/25/2010

7/29/2010

0.68

18.45

9/30/2010

10/28/2010

0.68

19.13

12/23/2010

1/27/2011

0.64

19.77

3/29/2011

4/27/2011

0.62

20.39

6/28/2011

7/28/2011

0.65

21.04

9/28/2011

10/27/2011

0.60

21.64

12/27/2011

1/26/2012

0.57

22.21

3/28/2012

4/26/2012

0.55

22.76

Buyer 3-3/16/2012

$16.00

6/27/2012

7/26/2012

0.55

23.31

9/27/2012

10/29/2012

0.50

23.81

12/26/2012

1/29/2013

0.45

24.26

3/27/2013

4/29/2013

0.45

24.71

6/27/2013

7/29/2013

0.40

25.11

9/27/2013

10/31/2013

0.35

25.46

12/27/2013

1/31/2014

0.30

25.76

3/28/2014

4/30/2014

0.30

26.06

6/27/2014

7/31/2014

0.30

26.36

9/29/2014

10/31/2014

0.30

26.66

12/29/2014

1/29/2015

0.30

26.96

3/37/2015

4/30/2015

0.30

27.26

6/26/2015

7/31/2015

0.30

27.56

Buyer 4 6/17/2015

$9.90

9/28/2015

10/30/2015

0.30

27.86

12/29/2015

1/29/2016

0.30

28.16

3/29/2016

4/29/2016

0.30

28.46

Click to enlarge

*Dividend not yet paid

Source: NASDAQ: Annaly Capital's Historical Dividend Payments

Now I know, I have demonstrated this type of exercise in the past and on other names. But it is important to see where you stand. There is no way anyone is losing money in the name unless they are trading poorly or not buying on big dips. It just doesn't add up. Okay, if you bought within the last few weeks it's possible, but, let's be clear, Annaly has had an amazing history of dividends and that's why we want to own the name longer term. The dividend has been at $0.30 for a significant amount of time and remains at the lowest it has been since late 2007 when the dividend was $0.26. Despite being down, the dividend is power. Let's look at how the four single time, buy and hold investors in table 1 would be doing.

Assume "buyer 1" bought at $8.51 in December 1999 and did not add on dips, sell a little when the stock ran up, or reinvested any dividends. This is simply the wrong way to invest but simplifies the math for our purposes. As of the current share price of $10.65, this person would be up $2.05 or 24%. That is a decent gain but is of course weak over nearly a 16-year period. This is where the power of the dividend comes into play. The dividends paid to date total $28.46 (with another $0.30 coming next month). Assuming again they only bought shares once in December of 1999 and didn't reinvest the dividends, the investment is now up $2.05 in capital gains and $28.46 in dividends for a total return of $30.51. That is a total of 359%. A more than quadrupling of one's money is a successful investment in this time frame.

Of course, I highly doubt any of you are buyer 1. Let's move to our second buyer. There maybe one or two of you reading who made your first buys in a similar time frame as our second buyer. Let us assume buyer two purchased shares at $12.80 in September 2005 and, of course, only purchased shares just once. At the current share price of $10.65, this person would be down $2.15 or 17%. That hurts in a market that is up sizably in that same decade. But this again is where the power of the dividend comes into play. The dividends paid to date for this investor total $17.80. So, the investment is now down $2.15 in unrealized capital losses, but up $17.90 in dividends for a total return of $15.75. That is a total of 147%. A more than doubling of one's money is a strong investment return in this time frame.

Make no mistake that short-term pain can be real. Thus, our third and fourth buyers could be better models for those reading this work currently. Let us assume buyer 3 purchased shares just one time at $16.00 in March 2012. As of the current share price of $10.65, this person would be down $5.30 or 33% on paper. This may be the case for some of you on paper who have been with Seeking Alpha or Annaly since I first started covering the name. But the dividends do matter and they total $6.25 for this investor, thus this investor is up $0.95 or 6%. Not good at all, but you haven't lost anything. Our fourth buyer may represent many of you. This a someone who bought a year ago, at $9.90. This investor is up $0.75 in capital gains on paper and of course up another $1.20 in dividends for a total return of $2.05 or 21%. That is pretty good.

So what is the moral of the story here? Timing matters. When you buy is so critical. That is why you should never be in a rush to pull the trigger on an income name. Wait for the big pullback. Then, unlike any of these buyers, you should be adding on big dips, and consider trimming the position when shares spike. Further, we need to be mindful of just how strong the dividend really is. As of July 2004 for buyer 1, every single dividend paid to this investor has been in excess of his original investment. The same holds true for buyer 2 as of July 2012. These investors can't lose, even if shares went to zero. The dividends will continue to be paid out indefinitely. Own a core position, trade a little around it if you like, and keep an eye on performance. Annaly is hanging in there, and shares have been stable. This is what you love to see as an investor in an income name.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I am/we are long NLY.

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.