Will Annaly Fly Higher Through 2012?

With half of 2012 in the record books, it's important to take a look at whether the stocks that interest you can live up to their full potential. By making sure you know about a company's future plans and possible challenges, you can make a better decision about whether it's a smart investment for your portfolio.

Today, let's take a look at Annaly Capital (NYSE: NLY). As we saw in our look at Annaly Capital last month, the mortgage REIT has put together a pretty strong advance so far in 2012 even as narrow interest rate spreads have caused it to cut its dividends in the past couple of years. Can Annaly keep delivering double-digit dividend yields and hold its own with its share price? Let's take a quick look at Annaly Capital's prospects for the rest of the year and beyond.

Stats on Annaly Capital

Source: Yahoo! Finance.

Where will Annaly Capital go from here?
Annaly finds itself in same boat as American Capital Agency (Nasdaq: AGNC), ARMOUR Residential (NYSE: ARR), and a host of other mortgage real estate investment trusts that focus on agency-backed securities. Low interest rates don't look like they're going away anytime soon, and as long as the Federal Reserve doesn't work too hard to bring long-term rates down toward the near-zero levels on short-term rates, the spread that Annaly relies on should remain more or less intact.

One threat, however, could come from a local government proposal to use eminent domain to buy mortgage loans, which the government would then restructure to get rid of problems with underwater mortgages. Under that scenario, Annaly and its peers might have their mortgage-backed securities essentially compromised. Some could argue that non-agency-backed loans like the ones that Chimera Investment (NYSE: CIM) and Invesco Mortgage Capital (NYSE: IVR) have as part of their portfolios might be more likely candidates for eminent domain, but the uncertainty from the inevitable legal challenges could prove to be a headache for Annaly and the whole industry.

That may be why analysts don't expect much price appreciation from Annaly. But with a 13% dividend yield, Annaly doesn't need to have its stock price go up in order to give investors a solid return.

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