Co-produced with Beyond Saving
One of the things I have learned over the years is to never be surprised by what "surprises" the market. Investing is about estimating risk. There's no such thing as an invincible investment that will only go up day after day. As investors, we have to assess the risk of a given investment and determine if the reward is worth the risk.
Sometimes there are cases where the market is unreasonably pessimistic on a company, even when there's plenty of evidence to suggest that earnings will be spectacular. Then, after earnings are announced the market will be "surprised" and the stock rockets.
This is the case with Annaly Capital Management (NYSE:NLY), an agency mREIT with a 10.5% yield. Early 2020 carried a lot of turbulence for agency mREITs, which NLY pushed through, and on the other side are ideal conditions for their business model.
Much like a rocket, NLY has broken through the turbulence of the atmosphere and is now free to generate cash and the market hasn't realized it yet.
Let's count down NLY's dividend rocket:
Five: Low-Risk Assets
On the surface, NLY's business strategy is not terribly complex. They buy agency mortgage-backed securities (MBS) and collect the coupon payment. These MBS are unique in that the principal is guaranteed by Fannie Mae or Freddie Mac. If a borrower defaults, NLY gets 100% of the unpaid principal. The credit risk is entirely carried by FNMA or FMCC.
As a result, agency MBS is widely regarded as being among the safest investments in the world with a AAA credit rating. They frequently trade in correlation with U.S. Treasuries. U.S. banks and insurance companies frequently use them to store capital.
Of course, since agency MBS is a very low-risk asset, yields tend to be quite low. So how does NLY
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