Quote:
Originally Posted by AMSOILGUY
Greg,
I recently was having a text conversation with a buddy of mine and we were briefly talking about investing. What sparked the conversation was in 2008 when we were in Iraq he had showed me some stocks he held at that time. He was only 18 and light years ahead of me when it came to investing apparently. I remembered he had AAPL shares and was showing me they had gone up and of course I told him to sell and he said I was crazy. I guess he was right! Regardless of that I asked him if he still held shares in anything and he said NLY. I looked at the chart and it has been on a steady decline for a while now. I said ouch and then he said "Its a yield play. Dividend is stong, share depreciation is a good entry. Its positive when it goes down."
Can somebody explain this to me?
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Annaly Capital Management (NLY) is something that I used in the past to "park" cash and create a yield stream. For a long while it was a fairly constant price - so was relatively safe from a price standpoint. However, It is largely a "mortgage interest rate" play -- and as such -- I had warned LONG AGO that if interest rates were to rise.... this type of holding will get punished as the spreads on what they hold will be devalued (like holding a low % bond) and that can more than offset (decline) any yield you'll see.
So let me put this very simply. Money chases YIELD.... if the bond market was paying a tax free 10% -- that's where the big money would go. Where would the big money come from (there's a finite amount of investible cash)? From the Stock market! Why would you invest in the stock market with a yield of 5 or so percent - and pay taxes - when you could get 10% tax free on a bond? So the market would go DOWN as the BOND yield became more attractive. What holds the stock market "up" is it's yield -- because as the prices of dividend paying stocks declined - provided they're paying the same dividend rate - their yield would go UP. A stock that is valued at $10 - that pays a $1 dividend - has a 10% yield.... but if that stock price declined to $8... and it continues to pay the $1 dividend -- it's yield is now 12.5%.
Dividends are declared and paid in dollar terms - not percentages. As the price of the stock goes UP -- and the dividend payout stays the same -- the yield % goes down -- as the price declines -- the yield % rises.
If you're a long term holder of a stock that declines -- but has a sufficient yield -- then "eventually" you'll be made whole. That's not a smart way to think about it - but it might be the only way to think about it versus selling the shares at a big loss and taking the capital hit. This works especially well if you're having the dividend reinvested -- as the dividend is then buying more shares (you'd get more shares at $8 than you would at $10) and over time this will bring your average cost down. It's not as simple as that --- because there is a "cost" associated with money... and you're potentially losing out on capital growth etc.
So fundamentally what you have to be aware of is ----- is the stock price declining because there is a fundamental change in the business - or the perceived fundamental change in the business.... therefore rendering it a bad holding ------ or is there potential for the share price to recover? In NLY case -- it's a dangerous holding in a rising interest rate market. Perhaps your buddy just doesn't really understand what NLY is really all about. He could be "blinded" by chasing yield rather than understanding the relationships of what interest rates can do to an interest rate sensitive company.
Brian Hobaugh SCCA National Tour June 2014
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. Just thought I'd share that, lol.
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