After going ex-dividend one month ago, Annaly (NLY) has already climbed past its pre-dividend price, providing investors with the best of both worlds: dividend income and capital appreciation.
Annaly's Q1 dividend was 55 cents per share. Despite being lower than in prior quarters ($.62, $.65, $.60, $.57 from Q1 to Q4 2011), the 55 cents still translates into a yield of over 13%.
As every seasoned dividend investor knows (though many people unfamiliar with dividend stocks do not know), a stock's price generally decreases by the same amount as the dividend on the day that the stock goes ex-dividend. (This makes sense, as the company distributes that amount from its own worth into the hands of shareholders). Annaly shares did fall when they went ex-dividend; shares closed at $16.24 on March 27th, and opened around $15.70 the next day before closing at $15.57, a drop of 67 cents. (The additional post-dividend drop can often be attributed to former holders selling out, since they have now met the holding requirement necessary to receive payment.)
Since then, shares have steadily climbed higher, as shown in the chart below (generated at StockCharts.com).
Shares have climbed during 15 of 20 sessions following March 28th, and now sit above pre-dividend levels.
Interestingly, Annaly shares do seem to regularly rise following a dividend payment. The following chart from Google does not adjust the historical price for dividend payments, allowing a clear picture of pre- and post-payment performance. Dividends are indicated with blue marks above the X axis.
Though shares have been stagnant over the past year (after adjusting for the dividend payments, shares were around $15.50 one year ago), it seems as though a pattern does exists; most of the upward performance in share price happens within a month or so of going ex-dividend. In June, shares quickly recovered the majority of the dividend before moving sideways and then lower into September's dividend. Following September's payment, shares rallied throughout the month of October, before moving sideways into the Q4 payment. December's share price appreciation happened a bit more slowly, with shares peaking in the first week of February before trending lower into the Q1 2012 payment in March. Four quarters of occurrence is probably the lower limit of what may constitute a pattern, but the regularity of this occurrence is interesting.
Traditional dividend-paying stocks require the owner to hold shares for a particular amount of time in order to receive preferential tax rates on the amounts received; this tends to inhibit trading in and out of securities around dividend payment dates. However, because Annaly's dividend payments are taxed as ordinary income, one does not need to hold for any particular period. Therefore, some investors may be tempted to buy Annaly prior to the dividend and sell when shares recover, usually about a month later.
However, the vast majority of mREIT holders would not be tempted to try such tricks. When shares yield 13% per year, there isn't much need to attempt to wring additional value out of the security, and over the past few years, steady holders of NLY shares have done just fine. (Below is a two-year chart from StockCharts.com)
Therefore, unsurprisingly, it seems to make sense not to trade in and out of a stock like NLY. If you believe that mREITS (including others like (AGNC) and (CIM)) have a bright future, it probably makes the most sense to hold shares consistently, and even reinvest dividend payments into additional shares. If you are more bearish about mREITS, simply avoiding them makes the most sense - shorting something that yields 13% is not very appealing. Still, the post-payment pattern does seem interesting, and I'm sure that someone out there has at least attempted to make money off of this interesting occurrence.
Disclosure: I am long NLY.