1 Simple Strategy to Invest in Annaly Capital Management, Inc. With Less Risk

While mREIT Annaly Capital Management has preformed incredibly well over the past 17 years, it comes with significant volatility. For investors looking for more stable cash flows, here's one simple tip.

Jul 22, 2014 at 6:05AM

Annaly Capital Management (NYSE:NLY) has put in an impressive 529% total return since its inception in October 1997. However, those returns have been far from consistent. There have been several years in which Annaly's stock price has plummeted more than 30%. 

Price Volitility Graph

For investors looking to avoid huge price swings, create more consistent cash flows, and sleep a little easier at night, it's as simple as also buying Wells Fargo (NYSE:WFC).

Isn't that just diversifying? 
Having another holding does limit your portfolio's exposure to Annaly. But we're not talking about buying a huge basket of stocks -- just one.

Why Wells Fargo? Over the past 17 years, Annaly's strongest periods of growth have been Wells Fargo's weakest, and vice versa.

Total return

CompanyOctober 1997 to 20022002 to 20062006 to 20102010 to today
Annaly  134% 2% 108% 16%
Wells Fargo  48% 65% (2%) 107%
Evenly invested in both 91% 34% 53% 62%

Source: Yahoo! Finance. Adjusted historical prices.

Why it works 
Annaly and Wells Fargo perform the best in very different environments. 

The best environment for Wells Fargo -- or any bank, for that matter -- is a strong or growing economy, which means more loans for credit cards, cars, homes, buildings, you name it. Also, since large assets -- such as homes and buildings -- appreciate in value during boom times, borrowers are less likely to default. 

That's exactly what we've seen over the past five years, as Wells Fargo's net charge-off ratio -- the amount of loans defaulting as a percentage of average loans -- is a remarkable 0.35%. According to CLSA analyst Mike Mayo, that's the lowest the company's ratio has been in "modern history."  

Banks also do well in a rising interest-rate environment. Since their main source of funding is deposits -- which have consistently low interest rates -- any increase in prevailing rates allows banks to lend at higher rates, ultimately increasing their net interest margin, or the difference between borrowing costs and asset yields. 

mREITs, on the other hand, preform best in exactly the opposite environment. In fact, Annaly's best periods of growth have come during recessions.

To slow the economy, perhaps in the face of a market bubble or soaring inflation, the Federal Reserve will sharply increase the federal funds rate -- short-term interest rates, in other words. Once the environment has calmed, interest rates are lowered to reignite economic growth. Since long-term rates don't immediately follow, we end up with an enormous spread between long- and short-term rates:

Best Time For Mreits Graph

That's the perfect investing environment for Annaly.     

Calling my bluff 
For those not convinced, I have a suspicion why:

  1. Past results don't always predict the future.
  2. Why Wells Fargo and not some other bank?  

I can't predict the future, but I do believe in market cycles -- meaning that the economy will expand and contract over time. In fact, interest rates have risen and fallen in a similar fashion to what you see on the preceding chart every few years for the past 45 years. 

I also believe that attempting to time those cycles is a mistake, and for that reason -- if you're looking for more stable returns -- it makes sense to hold businesses that perform well in different environments. 

Second, while in theory this could work with any bank, why invest in just any bank? If you're going to buy a business, I would much rather hold one that's well respected, mission driven, customer focused, and led by strong management, as well as one that has a history of conservative lending and a proven track record of creating shareholder returns. Not to mention that the company pays a solid 2.6% dividend. 

Ultimately, for investors who want to generate dividend income from a higher-yielding stock like Annaly but would also like to avoid some of the volatility, I believe investing in Wells Fargo will prove to be a simple and effective strategy.

Top dividend stocks for the next decade (other than NLY)
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

 

Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers