Please ensure Javascript is enabled for purposes of website accessibility

This Is Easily the Most Popular Dividend Stock

By Jordan DiPietro - Updated Apr 6, 2017 at 11:26AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors are in love with Annaly Capital Management.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Annaly Capital Management, Inc. Stock Quote
Annaly Capital Management, Inc.
NLY
$6.82 (1.04%) $0.07
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$146.67 (0.97%) $1.41
Chimera Investment Corporation Stock Quote
Chimera Investment Corporation
CIM
$9.61 (2.45%) $0.23
General Mills, Inc. Stock Quote
General Mills, Inc.
GIS
$77.00 (0.05%) $0.04
Enterprise Products Partners L.P. Stock Quote
Enterprise Products Partners L.P.
EPD
$27.15 (1.16%) $0.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.