Lateral-g Forums - Investing 102

Quote:

Originally Posted by Sieg (Post 431473)

Agency Mortgage REITs Likely To Benefit From Treasury's Modifying Fannie, Freddie Backing Terms

http://seekingalpha.com/article/8157...g_income&ifp=0

Mr. Weld - What's your take?

Yeah -- I'd read that article. I hold 35,000 Annaly Capital (NLY) shares so I follow any news like this.

My take is that we're still in the "undecided" camp on the economy and "rates" in general. It's a delicate balancing act of being ahead of the "curve" - in layman's terms - getting OUT of shares like this BEFORE you get killed -- and still holding - because of the outsized returns (dividend/interest) the name pays.

So - let's put that into an Investing 102 "thought process"..... using my holdings for an example.

35,000 shares @ todays price (17.04) = $596,400

Dividend payout currently = $19,250 PER QUARTER = $77,000 annually

My cost per share is $16.76 -- so right now I have a $9,600 "paper gain".

I don't buy shares like this for the "gain" -- I buy them to bring up my average % of "income". Remember that we're always dealing in money with PERCENTAGES -- and something like Annaly that pays almost 13% -- really helps bring up that average. If you had $600K in Coke and $600K in Annaly - you'd have some safety with a pretty decent "average" dividend. So this is how I "balance" my accounts out.

Now ------------ Let's say this cut the dividend payout by HALF --- so dropped from 13% down to 6%.... That would give a stock like this a BIG haircut! This is where we try to use some historical data to help up make a call on whether to buy or sell.

In 2006 NLY paid .26 a share dividend - and their share price was $16.00.... So that dividend rate was HALF where it is today -- but the share price was only $1 less... and over a 5 year period - their dividend rate has been all over the place! They've paid .75 a share - and they've paid .32... but even when their shares were at the low of the period (2008) at $9 - they were paying .55 a share.

Their range is about $2 a share for the last couple years -- somewhere between $16 and $18 bucks a share.... and the REASON for that is because of the "high" dividend payout.

So the conundrum is -- if they continue to pay me $77K per year -- is that more important than the CAPITAL AMOUNT I have invested. If their shares went down by 50% - I'd have a paper loss of $300K.... but if I get $77K per year - in 4 years I've gotten my money back... and who knows where the share price will be then.

My big worry would be if they cut the dividend in half SUDDENLY --- and the shares dropped by half. But when you look at the historic relationship of the share price and the dividend - they don't seem to do things SUDDENLY... AND if I pay attention to the MORTGAGE RATES I should have a good telegraph of what is going to happen in the future and therefore be "forewarned".

OKAY SO I'M BEING LONG WINDED.... but I'm trying to use this as some kind of "learning" experience for this thread....

The long and short of my take is -- it "depends" -- it depends on your GOAL for your investments. My goal is different and my horizon is different. My goal is CURRENT INCOME.... I already have the capital. I can sit and hold and collect that wonderful dividend/interest. I'm not freaked out by $1 or $2 capital "change". What I'm also going to say is ---- that people NEED TO UNDERSTAND WHAT THE COMPANY DOES AND HOW SMART THEY ARE.... because in the end --- that is what you're investing in! You need to trust the management to be way smarter about what they're doing than you are!

So go here and just read some of this....

http://www.annaly.com/site/marketcommentary.aspx#Asset

And you'll see that RMBS (Residential Mortgage Backed Securities) is just "some" of what they do...

BTW -- THE MARKET will tell us what they think - and THE MARKET is fickle... and if they sense that NLY won't be able to make a ton of money and pay that huge dividend -- we'll see that reflected in the share price. And since the price doesn't move all that much -- if you're at all concerned about what the upcoming elections have in store.... and how that will affect our taxes etc... then it never hurts to get out of the way of a train coming down the track...NLY only moves a little - so if you get out - you can get back in - it's not like they're going to jump $5 a share like APPLE....

ME? I'm holding and collecting that dividend. It's just too hard to find CURRENT high rate relatively safe places to put money to work.

I'd written before about BONDS - and that this years bonds were coming due and to roll them into the next 5 year due dates - I'd be taking a cut in return (they're paying 2%!) so I built up the cash and bought into an apartment LLC instead. Remember that we always have CHOICES where to put our money!