1 Obvious Reason Annaly Capital Management, Inc. Is a Bad Stock for Your Retirement Portfolio

There are few stocks in the market today that seem to be as attractive as Annaly Capital Management (NYSE: NLY  ) . However, there's much more to this stock than simply its 10.4% dividend yield.

In short, Annaly's best days are now in the rearview mirror and for the most part only challenges lay ahead. As a mortgage real estate investment trust, Annaly prospers when one or both of two conditions prevail. First, when the spread between short- and long-term interest rates expands. And second, when they do so in a declining interest rate environment.

This is why the financial crisis was a godsend for mortgage REITs. In response to the turmoil, the Federal Reserve dropped short-term rates to nearly zero. Meanwhile, although long-term rates followed suit, they took longer to decline and fell by a smaller margin.

The net result was that the spread between short- and long-term rates expanded, creating a particularly profitable scenario for mortgage REITs. Added to this, because interest rates decreased across the board, Annaly also got a boost to its book value, as MBS values and long-term rates are inversely correlated.

As Motley Fool contributor John Maxfield discusses in the video below, however, the current environment couldn't be further removed from this.

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  • Report this Comment On May 10, 2014, at 2:11 PM, HectorSector wrote:

    By my calculation NLY has paid out $25 per share in dividends since 2000 at an average price of about $14, a 13% return, uncompounded. A pretty good record. As to the future, if Mr. Maxfield could indeed predict it he'd have a good deal more notoriety than he does.

  • Report this Comment On May 10, 2014, at 2:22 PM, MelisssaLi wrote:

    good insight :)

  • Report this Comment On May 12, 2014, at 5:21 PM, JudasTouch wrote:


    Interesting video. For the sake or argument, let's agree that Annaly's best days are behind it.

    1. The same is true for all mortgage REITs or, for that matter, any enterprise that relies on a healthy spread between short-term and long-term rates. Is there something else about Annaly that inspired you to focus on it?

    2. Even if its best days are behind it, that doesn't mean there aren't plenty of good days ahead. If we want to measure Future Annaly against Past Annaly, we'd be better off comparing it to its performance across a range of more typical market gyrations, not a Black Swan event. Holding any company to a benchmark set during a once-in-a-lifetime (I hope) event would quickly limit our pool of investable companies.

    3. While it appears the spread between long- and short-term rates will remain smaller than usual for a while longer, I have to believe they'll normalize, giving Annaly's management team more breathing room, and investors more profit.

    4. If the worst that NLY did over the next ten years was to 1) keep pace with the S&P 500 and 2) simply maintain the dividend, it'd still be a better investment than 40% of the stocks I'll actually buy.

    Not too shabby.


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John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

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9/3/2015 4:02 PM
NLY $10.22 Up +0.08 +0.79%
Annaly Capital Man… CAPS Rating: ****