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Is Annaly Capital the Right Stock to Retire With?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. Let's figure out what makes a great retirement-oriented stock, then examine whether Annaly Capital (NYSE: NLY  ) has what we're looking for.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Annaly Capital.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$15.5 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

Free cash flow growth > 0% in at least four of past five years

4 years

Pass

Stock stability

Beta < 0.9

0.32

Pass

Worst loss in past five years no greater than 20%

(0.3%)

Pass

Valuation

Normalized P/E < 18

9.10

Pass

Dividends

Current yield > 2%

15%

Pass

5-year dividend growth > 10%

40.7%

Pass

Streak of dividend increases >= 10 years

0 years

Fail

Payout ratio < 75%

85.1%

Fail

Total score

8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With eight points, Annaly Capital gives conservative investors just about everything they could ask for from a stock. The question, though, is whether the good times can last forever -- or whether the favorable conditions that have supported both Annaly's price and its dividend will eventually end.

For years now, Annaly and its mortgage REIT peers have benefited from low interest rates. Invesco Mortgage Capital (NYSE: IVR  ) , Resource Capital (NYSE: RSO  ) , and American Capital Agency (Nasdaq: AGNC  ) now carry yields of more than 20%, and several other mortgage real estate investment trusts, including ARMOUR Residential (NYSE: ARR  ) , have yields approaching that mark.

With Federal Reserve Chairman Ben Bernanke pledging to keep rates low until 2013, Annaly seems to have the wind at its back. But some investors fear that the good times may be coming to an end. The SEC is reportedly looking into changing the way that mortgage REITs do business, possibly limiting the use of leverage that produces so much of their returns. In addition, the Fed's new "Operation Twist" arguably hurts mortgage REITs by reducing yields on the long-term mortgage-backed securities that they buy.

Retirees and other conservative investors have to love the healthy income that Annaly provides, but the stock's recent volatility shows just how sensitive it is to both economic news and threats to its business model. Investors have to be prepared for the impact to earnings and the dividend that narrowing interest rate spreads will eventually bring, but for now, Annaly is enjoying an unprecedented set of circumstances in the economy that is serving its shareholders very well.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add Annaly Capital to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Annaly Capital Management. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (7)

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 October 11, 2011, at 11:06 AM, zorro6204 wrote:

    Despite (apparent) public perception, RSO is not a peer to agency REIT's like NLY and AGNC. RSO is a finance company holding interests in securitizations that make direct loans to businesses and commerical real estate projects, a radically different business model.

  • Report this Comment On October 11, 2011, at 9:07 PM, karlm1 wrote:

    Dan, what do you see as a worst case scenario for NLY when interest rates rise as they eventually will. As a sailor I get the most nervous when sailing with the wind at my back.

  • Report this Comment On October 12, 2011, at 5:46 AM, dbtheonly wrote:

    Dan,

    Unfair as NLY is required to pay out 90% of profits. Penalizing them for no paying out less than 75%?

    Penalizing them for not increasing dividends over the last 10 years?

  • Report this Comment On October 13, 2011, at 2:09 PM, epnpg wrote:

    Dan

    Would you consider adding to NLY

    thanks

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

8/28/2014 4:00 PM
NLY $11.85 Down -0.04 -0.34%
Annaly Capital Man… CAPS Rating: ****
AGNC $23.51 Down -0.01 -0.04%
American Capital A… CAPS Rating: ****
ARR $4.20 Down -0.02 -0.47%
ARMOUR Residential… CAPS Rating: ****
IVR $17.51 Up +0.06 +0.34%
Invesco Mortgage C… CAPS Rating: *****
RSO $5.37 Down -0.02 -0.37%
Resource Capital C… CAPS Rating: ****

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