REIT Annaly Capital Management, Inc. (NLY 16.72 NYSE – yield 14.40%) invests strictly in mortgage-backed bonds, holding only bonds issued by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. These bonds are about as safe as U.S. Treasuries. Thanks to a much-needed dose of liquidity, things are running much more smoothly in the mortgage-backed bond market. But keep in mind, companies like Annaly don’t just buy bonds with their own cash – they borrow money to buy even more. And the cheaper the borrowing costs, the heftier the profits. Between appeasing foreign bondholders and keeping mortgage rates affordable, the Fed has a vested interest in keeping MBS yields low (and thus prices high). In other words, the playing field isn’t level – it’s tilted strongly in favor of bond investors like Annaly. The shares are nearly fully valued and nearing a 52-week high. But even with minimal appreciation, those fat quarterly dividends make the stock a solid idea for income oriented investors.
Paul Tracy & Nathan Slaughter, StreetAuthority Market Advisor