Annaly Capital (NLY)
I’ll start with mortgage real estate investment trust Annaly Capital (NLY). I’m normally not the biggest fan of mortgage REITs because, unlike equity REITs, their dividends are highly variable. If you’re depending on the dividend stream for your current living expenses, that can be a major problem.
Ideally, you want to own mortgage REITs when two conditions are in place:
- The spread between short-term rates and long-term rates is relatively high, as mortgage REITs tend to borrow short-term and lend long-term.
- The market value of the mortgage REITs is cheaper than the accounting book value. In other words, you could sell off the REIT’s assets for spare parts and still make a profit after repaying all debts.
Today, both conditions are in place for Annaly Capital. The Fed has promised to keep short-term rates at or near zero for the foreseeable future, and long-term rates — while still very low — are significantly higher than they were a year ago. Meanwhile, NLY trades for just 86% of book value.
Why should you hold NLY in an IRA? Because its attractive 11% dividend is not considered “qualified,” meaning that it is taxed as regular income — and that you could be paying 43.4% in a taxable account if you are in a high tax bracket (39.6% + the 3.8% Medicare surtax).
One last sweetener on NLY, by the way: Its insiders have been aggressively buying the stock.