Investors have an opportunity to ride the Annaly Capital Management (NLY) dividend wave for a couple more years! The double digit dividends may last another couple years! The allure of American Capital Agency then becomes its double digit dividend yield, but be cautious. Whether Annaly can continue at this pace safely leveraging its purchase of mortgage-backed securities much beyond 2014 is a question.
These low short-term interest rates have been very good for residential REITs like Annaly. Falling long-term rates have tightened profits recently and government programs like Operation Twist will continue to do so into the second quarter of this year. Lowering borrowing costs would counteract this, but Fed funds rate rests close to zero percent so there is not much room to move. As a good company should, Annaly is reigning in its leveraging over the past year in response to lower yields. The company is well-run and continues to be an attractive investment with its low valuations and promising business model. Annaly's investment policy has about 75% of assets short-term in nature and mortgage-backed securities and the remaining is comprised of qualified REIT real estate assets.
How long should we expect this 'good trend' to last?
It is true that if long-term rates go down, profits tighten up. But it is still a profitable period and it will take time to slow it down. Banks are still not welcoming home buyers and continue to remain conservative about lending. Lots of home owners are still underwater and refinancing is not that easy. This has been a profitable period of REIT's but not for the economy and it is going to take time for the big wheels of mortgage modifications to get moving. Home prices have fallen quite a bit so it will take time to get thing back up.
With favorable interest and prepayment rates basically locked in, we can expect Annaly Capital Management to continue to prosper for at least a couple of years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.