Annaly: A "Preferred" Play on Mortgages

03/30/2017 2:50 am EST

Focus: DIVIDEND

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Annaly Capital Management (NLY) invests in various types of agency mortgage-backed securities and related derivatives to hedge these investments, explains Jack Adamo, income expert and editor of Insiders Plus.

Annaly also originates and invests in commercial mortgage loans, securities, and other commercial real estate investments; lends customized debt financing to middle-market businesses; and operates as a broker-dealer.

The company has elected to be taxed as a real estate investment trust (REIT). As a REIT, it is not subject to federal income tax to the extent that it distributes its taxable income to its shareholders. Annaly Capital Management, Inc. was founded in 1997 and is based in New York, New York.

We shall go ahead with a new purchase of an Annaly's preferred stock, Annaly Capital Management Inc. 7.625% Series A Cumulative Redeemable Preferred Stock (NLY-E).

Do not confuse this preferred with the Annaly Capital Preferred (NLY-A), which we already own. The preferred with the suffix "A" has a dividend rate of 7.875%. The dividend rate of this recommended preferred is 7.625% and the symbol suffix is "E", not "A".

This is obviously confusing and I have no idea why it was done. To complicate things further, there is no set symbol designation for preferred stocks, so make sure you get that E suffix.

This series is the only Annaly preferred selling below its $25 redemption price at this time. If you want to be doubly certain and buy it by phone with your broker, the CUSIP for this series is: 41902R400.

The series is redeemable in August. At its current price of $24.67, the shares yield of 7.73% and if they were to be redeemed when allowed in August, your annualized return would be 9.96%.

In my opinion, redemption is unlikely. Management's bonuses are based on total equity, so there's no incentive for them to redeem any of the preferreds.

If they did decide to do so, there are two with higher interest rates that are redeemable before this one, so they would logically go first, but the highest rate series has been redeemable for years and is still out there, so I suspect this one will be around long after I'm gone.

Keep in mind that as a real estate investment trust the dividends are not eligible for the "qualified" dividend rate, so if you can put the shares in a tax-deferred account, you'll probably come out with a better net income. However, check with your tax advisor to confirm the best allocation for your particular circumstances.

Buy Annaly Capital Management 7.625% Cumulative Preferred up to $25. Buy only with a limit order, never a market order. The shares are somewhat thinly traded.

Subscribe to Jack Adamo's Insiders Plus here…

Related Articles on DIVIDEND