This Is Easily the Most Popular Dividend Stock

In late April, I wrote an article describing what I thought was the best dividend stock. My pick was Automatic Data Processing, because along with its dividend consistency, I felt that its business would dramatically improve as interests rates inevitably begin to rise.

Readers of the article revolted in massive droves; they wrote comment after comment expressing their utter disagreement with me. The following comment sums up pretty well how they felt:

"MO MO MO... give me More Altria [NYSE: MO] everytime."

Everyone seemed to love Altria's dividend growth and their near recession-proof business. So then I decided to write another article, this time asking investors if in fact Altria was the best dividend stock around.

And the answer is ...
Before I let you know what the most popular dividend stock is, let me say that investors seem to be incredibly passionate about this asset category right now. It may be that history has proven that dividend stocks outperform non-dividend stocks over the long term. It could also be because Treasuries are at all-time lows, so investors are clamoring for high returns anywhere they can find them.

In particular, readers of the Fool seem to be consistently bullish on companies like Procter & Gamble (NYSE: PG  ) and General Mills (NYSE: GIS  ) . Not only do they pay a solid yield, but both companies have increased their payout for six consecutive years -- in addition, their household name products seem to hold up well in a time when consumers are reining in spending.

Readers have also been specifically enamored of energy Master Limited Partnerships such as Kinder Morgan Energy (NYSE: KMP  ) and Enterprise Products (NYSE: EPD  ) . These companies transport and help store massive amounts of natural gas; they generally operate on long-term contracts, so they're not especially vulnerable to wild swings in commodity prices. In addition, they receive favorable tax treatment that allows them to pay out stellar dividends; 6.5% and 6.2%, respectively.

However, there is still one company that everyone seems to love -- the prom king of dividend stocks, if you will. And that stock, which is clearly the most popular one around, is Annaly Capital Management (NYSE: NLY  ) .

Why so special?
Annaly Capital is a real estate investment trust that specializes in managing a portfolio of collateralized mortgage obligations, mortgage-backed securities, and other mortgage pass-through certificates. As a REIT, the company is not subject to a corporate income tax as long as it pays 90% or more of its taxable income out to shareholders -- this is the reason Annaly has such an amazing 15.2% dividend yield.

Truth be told, Annaly's business, while seeming complex, is pretty simple. It borrows money at extraordinarily low rates (its average cost of funds was 2% this quarter) and then uses that money to purchase securities that typically yield 4%-5%. The spread on the interest income is where it makes all that cash.

Last quarter, the company sold $1.6 billion in mortgage-backed securities and realized a gain of $47 million; this is up from a measly gain of $5 million for the comparable quarter in 2009.

I think interest in the company is especially significant these days because of the stigma that comes with mortgage-backed securities -- most Americans would identify them with the type of crazed assets that helped to bring down our financial system. And truthfully, they wouldn't be too far off.

So who the heck would be investing in a company that invests in loans backed by supposedly shoddy mortgages?

Well, a lot of people would: 40% of the outstanding shares are held by individuals like you and me.

It's possible that investors find comfort in the fact that at least 75% of Annaly's MBSs have to be composed of "high-quality" assets. The majority of the loans are backed by agency guarantees. This is opposed to Annaly spin-off Chimera (NYSE: CIM  ) , which deals with a riskier portfolio that includes residential mortgage-backed securities, Alt-A mortgage loans, and jumbo loans -- however, that risk comes with a higher reward as Chimera pays a juicy 17.8% dividend!

The Foolish bottom line
There's no denying that the thesis behind Annaly Capital is pretty intriguing. As long as interest rates stay low and management remains sensible and prudent, it's almost impossible for them not to make money. And the longer that cash keeps rolling in, the longer those quarterly paychecks to shareholders keep rolling out.

What do you think -- is Annaly Capital currently the most popular dividend stock? Sound off in the comments box below!

Jordan DiPietro owns no shares. Automatic Data Processing, Enterprise Products Partners LP, and Procter & Gamble are Motley Fool Income Investor recommendations. The Fool owns shares of and has written covered calls on Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (47) | Recommend This Article (185)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 03, 2010, at 10:22 AM, FloydsBoys wrote:

    I have both CIM & NLY. I think that in the future MLPs will play a larger part in the way companies are set up.

  • Report this Comment On August 03, 2010, at 11:38 AM, scanlin wrote:

    Why not do a covered call on NLY and get the call premium too? Stock at 17.40 right now. You can get .54 for an Aug 21 strike 17 option. Make 0.8%, or 16.2% annualized. If called then buy it back and do it again next cycle.

    Covered call screener: http://www.borntosell.com

  • Report this Comment On August 03, 2010, at 11:38 AM, MarkDwindle wrote:

    I'd rather go for a Dividend Aristocrat like CenturyTel. Ok, less yield (currently around 8% according to http://www.dividend.co.nr ), but still nice.

    Just my .02

  • Report this Comment On August 03, 2010, at 11:57 AM, ginsir wrote:

    I like your recent recommendation National Grid - NGG

    pays a good dividend ( over 7%) and has gone up over 11% since your recommendation.

  • Report this Comment On August 03, 2010, at 12:21 PM, TMFPhillyDot wrote:

    @MarkDwindle,

    CTL is also an interesting pick that has been pretty popular recently with Fools. It still pays a really great dividend (8.1%) and has increased the dividend 36 years consecutively....can't go wrong with that! Should be interesting to see how the company handles the acquisition of Qwest moving forward.

    Thanks for the comment!

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On August 03, 2010, at 12:25 PM, EugeneSpud wrote:

    Nly is one of the best with a nice track record. Others: Epd, oks, T, dep . . . all have nice dividends and good track records.

  • Report this Comment On August 03, 2010, at 2:34 PM, TheDumbMoney wrote:

    Articles like this, though, as briefly mentioned, have me beginning to worry about a "bubble" in dividend stocks. On the one hand: totally crazy. On the other hand: I do sense a need to chase yield, and a perception that dividend stocks are "safer." This is very similar to the investment thesis behind bond-investment, right now. There are big distinctios of course, and reasons why I think dividend stocks are better than bonds in either a deflationary or in an inflationary environment. But still, it's a worry. One of many.

  • Report this Comment On August 03, 2010, at 4:03 PM, DJDynamicNC wrote:

    Good heads up on this. I'm going to consider both CIM and NLY very carefully.

    I don't think they should make up the core of anyone's portfolio (I leave that to businesses like Verizon, J&J and ADP with long and compelling dividend histories) but it's hard to argue with jumping on 15% or higher returns, especially in the current economic climate.

  • Report this Comment On August 03, 2010, at 5:21 PM, shipout wrote:

    I've ownes NLY for over a year. Love the stock AND the dividends.

  • Report this Comment On August 03, 2010, at 5:22 PM, shipout wrote:

    never coiuld spell OWNED right...

  • Report this Comment On August 03, 2010, at 5:50 PM, Wade32ru wrote:

    Great article. What happens if interest rates begin to rise? How sqeezed will that spread become?

  • Report this Comment On August 03, 2010, at 5:54 PM, KZMike wrote:

    Just bought NLY today and have had CIM for a while. Over the past year I've been accumulating several MLP's and have been fairly successful in managing to get a 'modicum' of diversity with STON; ENP; FGP;

    MMLP; CQP; to name a few.

  • Report this Comment On August 03, 2010, at 6:00 PM, robertinc wrote:

    Have held KMP, LGCY, EPD since 3/09. Love the appreciation and dividend. Just picked up NLY recently--more stable, in my opinion, than CIM. Looking at MMP, AVA and Navios Marine. Other than some covered calls, stable dividend payers seems to be the only game in town in this market.

  • Report this Comment On August 03, 2010, at 6:16 PM, gilsh wrote:

    Two points I just don't get -

    1) How can companies give away dividends with such large debts ? isn't it clear that some of the debt is caused by the dividends distribution ? how can that be in the investors best interest ? come on !

    2) Dividends-investment is long-term oriented. How can anyone invest in a business whose ability to pay dividends is solely based on low interest, when it is clear that interest rate is just BOUND to rise ?

  • Report this Comment On August 03, 2010, at 6:20 PM, right2bfree wrote:

    Do you ignore the fact that there is a strong possibility that the tax rate on dividends will be going up with the demise of the Bush tax cuts? That should have a negative impact on dividend stocks.

  • Report this Comment On August 03, 2010, at 7:01 PM, phillips49 wrote:

    I own GIS and recently bought NLY, MFA and AGNC

  • Report this Comment On August 03, 2010, at 7:26 PM, Clint35 wrote:

    I wouldn't buy this stock with my worst enemy's money. It's nothing but a house of cards waiting to fall. A lot of you are kidding yourselves with the reasons to own this stock. The yield isn't good enough to take on that kind of risk, no yield is! One of the reasons dividend stocks are such good investments is because of a compounding interest effect. You get paid a dividend, you re-invest the dividend, you get paid more dividends. The thing is, it takes a long time for a dividend investment and re-investment to start compounding. So by investing in a risky company like this one because it has a huge yield you're doing yourself a disservice. As soon as they get into trouble (and they will, all companies do eventually) this company will change its corporate structure so it doesn't have to pay a dividend anymore. Then it will cut like crazy or totally do away with the dividend. Then you'll have to start the process all over with a different company.

  • Report this Comment On August 03, 2010, at 8:13 PM, richvermil wrote:

    NLY is definitely worth a look but there is little doubt that the most popular dividend stock iis MO.

  • Report this Comment On August 03, 2010, at 8:34 PM, killerpants wrote:

    gilsh,

    the debt is not caused by the dividends. it is that capital structure of high debt and low equity that allows nly to make the payouts that it does. it is that very leveraged position that has kept its yield so high over the past few years despite the consisent payout (that and the interest rate risk you are talking about). people who are still buyers of nly probably believe in a combination of the two ideas that the low interest rate environment is going to continue for a while and that the management is capable of managing their interest rate risk (since their assets are more sensitive to interest rate moves than their liabilities: see http://en.wikipedia.org/wiki/Bond_duration). They could probably manage their interest rate risk with swaps, swaptions, etc, but i'm not familiar with their derivatives activities.

  • Report this Comment On August 03, 2010, at 8:47 PM, Quick2learn wrote:

    The market I am sure we all agree is a game in flux, and we all must continue to watch and change our strategy as the game changes. I feel most people will not buy into just one company and stick with it forever, if you read the posts earlier in this thread. So many people buying this one and just getting into that one, and reporting an experience with another. All of these investors changing or trying strategies that offer dividends as a way to make cash. We have to try these options, swim or sink, for some, the game at times can just get too volitile for some of us, and others find THAT a good time to invest, The market has something for everyone it never stagnates.

  • Report this Comment On August 03, 2010, at 10:43 PM, phillips49 wrote:

    Annaly was founded in 1996 and has paid regular dividends ever since. They survived the financial crisis and paid dividends the whole time.

    We have no-flation. We have a very slow recovery. Unemployment is high. Interest rates should continue to be low for long time. Annaly is worth a look.

  • Report this Comment On August 03, 2010, at 10:45 PM, pkluck wrote:

    As someone pointed out starting in 2011 dividends will be taxed at over 50% for a lot of investors, (40% fed plus state income tax and throw in a little AMT for good measure). Dividend stocks will lose their luster, I know I'm cutting my dividend stock holdings, that said Shell has a p/e of less than 12 and a yield of almost 6%, that's like a high grade bond. Oil won't be replaced by alternative energy for decades and Nobama will cut production in the US causeing prices to only go up.

  • Report this Comment On August 03, 2010, at 10:59 PM, gkoeninger wrote:

    I am retired and told I need to put 40% in T Bills, After thinking about this, I voted to put my few dollars in corporate dividend stocks rather than trust our Congress and President, presently using the Fed presses to print money in order to pay the interest on T Bills. Is this right or wrong thinking?

  • Report this Comment On August 03, 2010, at 11:39 PM, pkluck wrote:

    I'm cutting dividend paying stocks for growth stocks to get the lower capital gain rates. You don't have to be rich to hit the top income tax brackets and no matter what you make you should be using tax planning to minimize what you pay to uncle nobama to waste. Look at it this way if you minimize what you pay in taxes you can donate more to your favorite charity. Don't be envious of other people or their money work hard and you can get there.

  • Report this Comment On August 04, 2010, at 9:24 AM, puphat wrote:

    I have owned NLY about 5 or 6 years for the dividend. The first year, the dividend was slashed to a few cents a share. I've held it to this day and have rewarded many times over, reinvesting the dividend. I watch this one closely and will sell most, if not all, when it reaches a certain price or interest rates start to creep up. The 15% dividend is not carved in stone.

  • Report this Comment On August 04, 2010, at 10:24 AM, bellbell63 wrote:

    My favorite income stock (in a taxable account) is MYN. 6.1% Triple tax free (NY). Invests in insured NY muni's. However, yield is somewhat sensitive to short-term interest rates also. They leverage by borrowing short term and lending (buying bonds) long term.

  • Report this Comment On August 04, 2010, at 12:38 PM, KZMike wrote:

    One thing to understand about MLP's, most/many/some of the MLP's are part of a holding company arrangement, so the Fundamentals you might see regarding the specific MLP are not always 'complete'. . . you will need to look and see if there are holding companies involved. I also suspect there is some 'creative accounting' that provides the best possible outcome for share holders. . .Also, since the MLP redirects revenues[profits] to the MLP share holder, rather than paying Federal Corporate taxes, the pay out is higher than it would other wise be. T

  • Report this Comment On August 04, 2010, at 1:47 PM, Aristocrisis wrote:

    A lot of scepticism here about these high yielders. I can see that, and they should never be the major part of your portfolio.

    But stocks like CIM and NLY are actually quite low-priced, if you consider their PB ratios. And historically, in times where they have cut their dividends; the prices have held up quite consistently. Or moved down - to slightly below book value. I would be much more careful with stocks like Public Storage, which trades at around 3x book, and yields much less.

    The market will always be a bit irrational, but keep some high-yielders in your portfolio, if not for safety, then for the spice or fun of it.

  • Report this Comment On August 04, 2010, at 2:27 PM, SCLInvestor wrote:

    How can you not like a Dividend Yield of 15.69%? However, how long can it last with a

    Payout Ratio of 145.50%.

  • Report this Comment On August 04, 2010, at 11:12 PM, MegaEurope wrote:

    Of course NLY isn't the most popular, that's just silly. Look at CAPS - it is a 3 star stock with 1450 bulls. So its popularity is behind over a hundred dividend paying stocks.

  • Report this Comment On August 04, 2010, at 11:46 PM, 750360 wrote:

    Have you looked at interest rate risk? If they are funding fixed rate assets with floating rate liabilities, they will quickly move to losses as their margin goes from positive to negative. A 15% dividend will quickly go away and be replaced with capital losses as the value of the assets plummets as rates rise. I haven't looked myself but would be willing to bet this is why the dividend rate is so high. It might not have anything to do with unattractiveness of mortgage backed securities, but rather poor asset liability management.

  • Report this Comment On August 05, 2010, at 1:58 AM, JadeJasper wrote:

    You can limit your risk and watch the interest rates.

    Sell when the interest rates go up and you think the dividend will stop coming.

  • Report this Comment On August 05, 2010, at 2:13 AM, ikkyu2 wrote:

    "Truth be told, Annaly's business, while seeming complex, is pretty simple. It borrows money at extraordinarily low rates (its average cost of funds was 2% this quarter) and then uses that money to purchase securities that typically yield 4%-5%. The spread on the interest income is where it makes all that cash. .. As long as interest rates stay low and management remains sensible and prudent, it's almost impossible for them not to make money."

    Why would I switch my portfolio over to Annaly Capital? I'm still doing great with my investments in NovaStar and New Century Financial. Same business model!

    You guys have the institutional memory of a gnat. Then again, you guys were recommending New Century right up to Dec 2005.

  • Report this Comment On August 05, 2010, at 7:59 AM, JoKingMe wrote:

    Seems to me that there should be some mention of the impact of the 1BILLION in new stock just issued as well as what will happen if short term interest rates rise.

  • Report this Comment On August 05, 2010, at 9:42 AM, PDHans0n wrote:

    Seems to me that Annaly would be a good choice for part of a ROTH - NO taxes to pay!

  • Report this Comment On August 05, 2010, at 11:20 AM, Nrgyindependance wrote:

    I have owned NLY 7 - 8 years so I have seen how it is impacted by various types of markets. I have been reinvesting divs and have enjoyed a nice increase in value.

    True, as short term market int rates move higher there is a temporary impact to the cost of money for NLY. But also the yields on mortgage securities (income) will go higher as well, but there is a lag. But over time the income and cost interest rates will "self adjust" as long as NLY is good stewards of the $$. And they have been. They also adjust the leverage based on the current market environment. The rates do not change that fast and especially in today's market the borrow cost seems to be stagnant for a long time at low costs. The longer the costs stay low -- the longer they print money!

    As for the new stock sale: Influx of new investement $$ allows them to buy even more MBS and increase their income. How is that a bad thing?

    The other risk to the dividend is people prepaying their loans to get lower int rates on home mortgages. I suspect that most of that is done at this time. But even that self adjusts over time.

    NLY is not a short term hold, but all the benefits are truly enjoyed over a long term holding.

  • Report this Comment On August 05, 2010, at 11:42 AM, bluebird4 wrote:

    Annaly has long been my favorite dividend-paying stock. I have a lot of shares in my regular IRA and a smaller amount in my Roth. Wish it were the other way around.

  • Report this Comment On August 05, 2010, at 1:26 PM, learningfool1873 wrote:

    I'm just learning - there's SO much I don't know yet - but I do remember reading an article some time ago that was cautioning against buying some high-yield stocks because it was a very good possibility that the companies were on the verge of collapsing. Am I remembering wrong???

    I have some dividend-paying stocks in my regular IRA & have re-invested the dividends when they have agreements with my brokerage. Actually, I'm trying to learn enough so that some day I'll feel confident in taking over more of my account. Right now, even though I pay enough to have them take care of most of it, I'm gradually taking over more. If I can remember to do my homework before I buy, I'll have a fighting chance! I made one major mistake, but think I have really learned from it, so guess it wasn't a total waste.

  • Report this Comment On August 07, 2010, at 8:58 AM, B0ffo wrote:

    Very interesting comments in this section. Here is my background and investment strategy. I am retired (been retired for five years). My wife still works but will be retiring at the end of this year. My current portolio consists of: 100k in CDs, and 400k in an IRA brokerage account. Any income I earn on my IRA brokerage account is only taxable when I extract it. To date, I haven't extracted a dollar from the brokerage account, because, frankly, I havn't needed it The CDs are paying, on average, 2 per cent. I know, I know, low yield--but safe. I may rethink the CD pricture as they mature. On to my brokerage account--I am a day trader ( more a scalper than anything) and I am very careful about my trades. Last year, I made 20% on my invested funds. I am not bragging, but 20% is a good return. My style is to wait for crap days in the market, then scoop up bargains. Yesterday, for example, was a good day. The market tanked after a crap jobs report. Stocks took a nice little tumble. I scooped up some goodies at their low, and waited. Whammo, made a quick 10 grand when they bounced back!!!!

    I enjoy the motey fool and read a lot of the articles, but unless I can find something that is gonna give me 20%, I will continue to do what I do. All you folks with high risk aversion probably won't do what I do. When I find myself losing my edge, I will consider alternatives, but, for now, I will stick with my investment style.

    Stay thirsty, my friends!!

  • Report this Comment On August 07, 2010, at 9:40 AM, FlorisHJ wrote:

    Just a reminder to all the optimists out there: there is no such thing as a free lunch and it's unlikely that a yield of 15% doesn't have some price attached. "consistent returns" in up and down markets smells fishy to me - have we forgotten Madoff already?

    Be sure you understand how this money gets printed - if it was safe the market would not reward you with 15%

  • Report this Comment On August 07, 2010, at 10:05 AM, lmcgarv wrote:

    Have just purchased Ares Capital which pays about 10%. Seems to have good financials and is owned by Vanguard and Fidelity. Easily covers its dividend. A recent purchase, it has already in value.

  • Report this Comment On August 07, 2010, at 1:05 PM, SAMSCREEK wrote:

    Hey, Imcgarv,

    If you like Ares Capital, then you'll love Mainstreet

    Capital, symbol: main. I have followed Mainstreet

    for a couple of years and finally bought some a

    couple of months ago.

    Also, I have been investing in the closed-end

    funds (cef's) that invest in municipal bonds and are federal income tax free. Many of these pay

    in the 6% - 8% range. There is a website

    www.cefconnect.com that is very helpful and full of info on CEF's.

    As far as nly is concerned, it is a good company

    but, I like the utilities and energy companies for a

    more stable growth and income play. I really like the cef's, but are a little more risky.

  • Report this Comment On August 07, 2010, at 1:24 PM, fool425 wrote:

    It's foolish to purchase stocks based upon dividends or tax considerations. If the Bush tax cuts are allowed to expire, it will not raise taxes that much for most of us unless we are counting on most of our income from capital gains. First, one has to assess fair market value and estimate future income. /Users/hbuhr/Desktop/saupload_ddn041110taxesgd_668287c_thumb1.jpg

  • Report this Comment On August 08, 2010, at 9:54 AM, chiro85 wrote:

    Well, I do own quite a few shares of CIM LINE, etc. But I also have a significant position in vz,intc, jnj, ko where I can get a decent dividend and I'm buying blue Chips at a bargain basement price. Many great investors have gotten rich this way (blue chips/great stock price)........Why not collect more yield than a CD while waiting for great American companies to regain their popularity? Think Warren Buffet in the 1970s without the good yield (compared to CDs).

  • Report this Comment On August 08, 2010, at 5:09 PM, stilllearning96 wrote:

    I wonder if now that the government's intervention in home mortgages has ended will NLY continue to perform as well.

  • Report this Comment On August 20, 2010, at 3:01 PM, mitchjl wrote:

    I recently sold WHX and Bought NLY after checking many high dividend stocks.I fell secure in my choice.Risk was a factor in my selection.

  • Report this Comment On September 29, 2010, at 10:39 AM, jdobbins828 wrote:

    I've owned NLY for a while now. It is up over 16% overall. When other people told me to sell, I stuck with them and haven't been disappointed!!!!!!

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