Annaly Is A Tempting Dividend Investment If You Think About Total Income

Annaly Capital could be an intelligent investment if you think about total payouts over the course of a full business cycle. If volatility and dividend cuts bother you, this could be a disastrous investment. Image used courtesy of Mary and Angus Hogg.

Annaly Capital could be an intelligent investment if you think about total payouts over the course of a full business cycle. If volatility and dividend cuts bother you, this could be a disastrous investment. Image used courtesy of Mary and Angus Hogg.

Right now, Annaly Capital, a mortgage real estate investment trust, is trading at $11.62 per share. That is intriguing because the firm’s book value is currently $12.13 per share. Anytime a company is worth more dead than alive according to the stock market valuation, it’s worth a look to see what’s going on (especially given Annaly’s long-term tendency to trade at valuation ranges of 10-25% in excess of its book value).

What causes this to happen? There are three reasons why a mortgage REIT can become cheap: (1) no one wants to touch it because dividends and earnings are all over the place, (2) they are highly leveraged, (3) and they tend to get whacked around a bit when interest rates rise sharply. I’ll elaborate a bit on that last point—the general strategy of most mortgage REITs is to borrow money at the short-term rate and then park in a fixed rate, mortgage-backed security for the long term. When interest rates rise sharply, they tend to run into trouble because they have to borrow at a higher rate to make new short-term investments, while their existing portfolio of mortgage-backed securities is baked into lower rates than what the new normal has become.

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The Monthly Dividend Machine That Always Replenishes You With Fresh Cash

Realty Income has been paying out monthly dividends for 45 years. Since being listed on the New York Stock Exchange in 1994, the monthly dividends have increased at a faster clip. Realty Income is one of the few monthly payers you can buy without having to sacrifice the quality of your business.

Realty Income has been paying out monthly dividends for 45 years. Since being listed on the New York Stock Exchange in 1994, the monthly dividends have increased at a faster clip. Realty Income is one of the few monthly payers you can buy without having to sacrifice the quality of the investment. 

In the world of monthly-paying dividend stocks, there tends to be a recurring problem: companies that choose to pay dividends monthly tend to do so for gimmicky reasons to mask the inferior quality or growth prospects of their holdings, and treat the monthly cash payout as an excuse to seduce income investors who would otherwise have no interest in buying the stock (note: I’m not referring here to energy MLPs that pay dividends monthly nor closed-end funds that pay dividends monthly).

There is where Realty Income enters the picture. For a real estate company, Realty Income has a record of taking care of income investors that is unmatched in its industry. It has been paying dividends every month for the past 45 years, and in addition to paying out cash every month, has generally adopted the informal practice of raising the dividend every quarter.

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Sears Holdings: A Successful, Diversified Stock Portfolio (Say What?)

Although Sears has been steadily imploding for the past two decades, it has left an excellent collection of businesses for shareholders behind in its wake. The accumulation of shares of Morgan Stanley, Discover, Allstate, Sears Canada, and now, Lands' End, in addition to Sears Holdings, has made the company an excellent long-term investment, counterintuitively.

Although Sears has been steadily imploding for the past two decades, it has left an excellent collection of businesses for shareholders behind in its wake. The accumulation of shares of Morgan Stanley, Discover, Allstate, Sears Canada, and now, Lands’ End, in addition to Sears Holdings, has made the company an excellent long-term investment, counterintuitively.

If you look at the current and recent past balance sheet of Sears Holdings, you will see nasty, nasty things. Pretty much every qualitative and quantitative value that is treasured on this site is found lacking when applied to Sears.

The company is currently selling as much as it did in 2005, while generating only about a quarter of the cash flow that it did almost a decade ago. After making $1.4 billion in net profit for shareholders in 2006, the company fell into the abyss—losing $500 million in total for shareholders in 2011, $200 million in 2012, and $700 million in 2013. Estimates for 2014 seem to indicate that this will be a throwback to 2011 for Sears shareholders, as the company is on pace to lose $400-$500 during the current year. The company hasn’t had a profit margin since 2010, when it made 0.5% on its operations net of all costs. Furthermore, it is a corporation that responded to the idea of merging with K-Mart by saying, “Yeah, we’ll do that.”

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