It is true that the Agency guaranteed REITs have delivered great dividend distributions for the last 18 months or more. American Capital Agency (AGNC) has yielded about 15% while MFA Financial (MFA) gives about 12.5%. And for the immediate future, these dividends look like they are going to stay around. It is very unlikely that the powers that be will mess with the low interest rates in an election year.
I am interested in looking at Annaly Capital Management (NLY) for one specific reason. It is not hard to support these REITs right now because of the way global economy has acted. Investing in a double digit dividend is about the best return someone is going to get right now. And these have consistently performed. So yes, owning the stock and collecting the dividend is good, but when I see certain signs in the stock, I am also interested in creating an opportunity for short-term income.
But first let me reiterate while we have the election year, it looks like the Fed will keep interest rates low, at least through the end of the year. But as to how long the interest rates can stay this high is to be seen. Regarded Solutions wrote an article recently on Seeking Alpha and mentioned the Fed's zero interest rate policy (ZIRP) - that it should stay low through 2014. After that period, giving words of caution about the future, the author wrote:
If interest rates are lower on the long end of the curve, it makes it more difficult to increase profits, unless REITs use more leverage and go further out on that curve. I am confident that the next quarter will be stable and could possibly show an increased dividend, but going forward, the situation bears watching.
But let it be known, while ZIRP exists, Annaly should be giving generous (but possibly fluctuating) dividends along with the other REITs I mentioned here.
While the stock is in the midst of a strong move up, as we can see it is riding the upper Bollinger Band-this is a strong move up. Because the present economic atmosphere continues to be strong and favor the REITs, we are going to suggest buying an option and either holding it for future buying power, or reselling it at a future date.
(click to enlarge)
The Options Play
- Buy a January 2013 call with a strike of '17.50' (priced at $0.15)
This is a straight option purchase with low risk and low cost. Presently the stock is trading at 17.12 and does not have far to go until it reaches that point. Being in the middle of a strong upswing, it may be carried there in the next 30 to 60 days. But at such a good price, an investor can make a good profit by reselling the option on increased value. So we have the three ways to make money with the REIT. But the stock as it increases in value, partake of the large dividend, use options to create a short term income opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
