Income Without the Dividend: A Strategy for Generating Income in a Down Market [View article]
DVK and nothingveryclever, thanks for the comments.
To clarify...when we refer to the dividend yield being "wiped out" by a falling stock price, we mean that the stock price declines by a greater percentage than the dividend yield itself...essentially putting the investor under water on the position (negative total return). Yes, you still get the actual dividend, but that's like taking money out of one pocket and putting it in the other. It's hard to say that you are making X% yield on a stock, if your initial capital is declining at the same time.
The total return on a dividend stock has two components: (1) the dividend yield and (2) the change in stock price. Most of the time both of these components have a positive effect on your total return. However, a significant price decline can literally "wipe out" years of dividends, resulting in a negative total return. This is why buying at the right price is extremely important...
Yield Chasers Beware: Cautionary Outlook on Junk Bonds [View article]
Thanks for the comment, dancing diva. You can see from our past articles, we are very cautious in our market outlook and have only been recommending high yield and defensive stocks on the long side. In addition, we have several recent articles about short candidates and hedging strategies...
A Deeper Look at American Capital Agency Corp and Its 18.4% Dividend Yield [View article]
Thanks for the comment, jerdawg. The major differences are leverage and management fees. The leveraged deployed in these REITs can be significant and should be understood and monitored by investors. You are also paying higher fees to the managers for running a more active portfolio. Our bias in NLY and MFA are primarily due to the tenure… simply put more history indicates to us that they can manage a leverage balance sheet.
A Deeper Look at American Capital Agency Corp and Its 18.4% Dividend Yield [View article]
For the reasons you outlined (barbell fixed / floating strategy and tenure) we are weighted towards NLY. We think prudence and caution is warranted in an uncertain environment. NLY management has shown that they can manage the risks on running a large levered balance sheet. We are willing to give up a bit of yield for the management team.
We think REM is a decent alternative to owning a basket of REITs. However, you are exposed to the same market risks with REM, so we prefer the higher yields of a carefully selected basket...
Comparing the 8 Largest Mortgage REITs [View article]
NLY currently trades at 1.15x thus a large issuance would likely impact the stock. The play here is the dividend so we want to retain our position. As REITS are required to payout 90% of earning growing the asset base primarily comes in the form of new issuance. We would be cautious of adding to the position at meaningful premiums to book. Investors are paying a premium due to the cash flow yield.
Preserving Income: One Strategy for Protecting Profits and Dividend Yield [View article]
We tend to agree with you, Five Plus Investor. New/Novice investors should definitely educate themselves and feel comfortable with a shorting/hedging strategy before implementing it. Raising your cash position is always a good risk management technique, regardless of how much experience you have!
BTW - We have enjoyed reading your "Sleep at Night" series...keep up the good work!
For investors interested in learning more about shorting selling, we wrote a primer that highlights some things to think about when considering a shorting strategy:
Preserving Income: One Strategy for Protecting Profits and Dividend Yield [View article]
Thanks for the comment, divmonster. The SDS trade does not change after yesterday's swoon. If anything, the significant break in price yesterday in SPY (through the 50-day moving average) confirms that the market is in fact breaking down. We think it would be wise to hedge your portfolio at this point. Covered calls are a great strategy to generate additional income in a neutral to slightly down market...but the SDS trade will help protect you from a significant drop in the market.
Think of the SDS trade as portfolio insurance. The insurance premium (i.e., your maximum loss on the trade) should be set at a level you are comfortable with. That said, the more premium you pay, the more coverage you get. Position sizing is a very important risk management strategy. Here is an example:
If you don't want to risk any more than $1000 on the SDS trade, you would purchase no more than 628 shares.
Current Price: $20.99 Stop Loss: $19.40 Max Loss: $1.59 Max $ Risk: $1000
Position Size = Max $ Risk / Max Loss (per share) = $1000 / $1.59 = 628 shares
If SPY drops 10% from the current level, your SDS trade would provide $2,631 of coverage.
10% drop in SPY = 20% gain in SDS (to $25.18)
$25.18 - $20.99 = $4.19 x 628 shares = $2,631 of coverage
Achieving Portfolio Diversification Through REITs [View article]
Thanks for the comment, Tom L L. You are right, the most recent quarterly dividend was $0.187. However, REIT distributions fluctuate from quarter to quarter, with the largest quarterly dividend typically coming at year-end (12/31). Here are the last 4 dividend distributions for RWX (total 12-month distribution of $3.414):
Income Without the Dividend: A Strategy for Generating Income in a Down Market [View article]
Income Without the Dividend: A Strategy for Generating Income in a Down Market [View article]
To clarify...when we refer to the dividend yield being "wiped out" by a falling stock price, we mean that the stock price declines by a greater percentage than the dividend yield itself...essentially putting the investor under water on the position (negative total return). Yes, you still get the actual dividend, but that's like taking money out of one pocket and putting it in the other. It's hard to say that you are making X% yield on a stock, if your initial capital is declining at the same time.
The total return on a dividend stock has two components: (1) the dividend yield and (2) the change in stock price. Most of the time both of these components have a positive effect on your total return. However, a significant price decline can literally "wipe out" years of dividends, resulting in a negative total return. This is why buying at the right price is extremely important...
Yield Chasers Beware: Cautionary Outlook on Junk Bonds [View article]
5 Cheap Stock Options to Protect Against a Sudden Global Slowdown [View article]
Yield Chasers Beware: Cautionary Outlook on Junk Bonds [View article]
A Deeper Look at American Capital Agency Corp and Its 18.4% Dividend Yield [View article]
A Deeper Look at American Capital Agency Corp and Its 18.4% Dividend Yield [View article]
We think REM is a decent alternative to owning a basket of REITs. However, you are exposed to the same market risks with REM, so we prefer the higher yields of a carefully selected basket...
Comparing the 8 Largest Mortgage REITs [View article]
investor.annaly.com/fi...
Preserving Income: One Strategy for Protecting Profits and Dividend Yield [View article]
BTW - We have enjoyed reading your "Sleep at Night" series...keep up the good work!
For investors interested in learning more about shorting selling, we wrote a primer that highlights some things to think about when considering a shorting strategy:
seekingalpha.com/artic...
Preserving Income: One Strategy for Protecting Profits and Dividend Yield [View article]
seekingalpha.com/artic...
seekingalpha.com/artic...
Preserving Income: One Strategy for Protecting Profits and Dividend Yield [View article]
Think of the SDS trade as portfolio insurance. The insurance premium (i.e., your maximum loss on the trade) should be set at a level you are comfortable with. That said, the more premium you pay, the more coverage you get. Position sizing is a very important risk management strategy. Here is an example:
If you don't want to risk any more than $1000 on the SDS trade, you would purchase no more than 628 shares.
Current Price: $20.99
Stop Loss: $19.40
Max Loss: $1.59
Max $ Risk: $1000
Position Size = Max $ Risk / Max Loss (per share)
= $1000 / $1.59
= 628 shares
If SPY drops 10% from the current level, your SDS trade would provide $2,631 of coverage.
10% drop in SPY = 20% gain in SDS (to $25.18)
$25.18 - $20.99 = $4.19 x 628 shares = $2,631 of coverage
Comparing the 8 Largest Mortgage REITs [View article]
Comparing the 8 Largest Mortgage REITs [View article]
online.barrons.com/art...
Achieving Portfolio Diversification Through REITs [View article]
3/18/11 - $0.187
12/17/10 - $2.615
9/17/10 - $0.323
6/18/10 - $0.289
At today's price of $41.00, the annual dividend yield is 8.33% ($3.414 / $41.00).
Comparing the 8 Largest Mortgage REITs [View article]