In the event you’re like most investors, you like the market’s long-term upside. You simply don’t need to suffer its occasional (and sometimes painful) setbacks. Problem? You do not know when crashes are coming. The most effective you’ll be able to hope for is minimizing their misery once they arrive. And the very best solution to do this is by being properly positioned before big pullbacks take shape.
With that because the backdrop, there’s one name particularly I’d consider owning now just in case a market crash is looming. That is Annaly Capital Management (NYSE: NLY).
Never heard of it? Don’t sweat it. You are not alone. It isn’t exactly a household name, and with a market cap of only $10 billion, it is not prefer it garners an amazing deal of the financial media’s attention.
It does its job for investors incredibly well, though.
What’s Annaly Capital Management?
Annaly Capital Management is a real estate investment trust (REIT). Just because the name suggests, REITs are real estate-focused organizations. REITs own properties starting from hotels and office buildings to strip malls, apartment buildings, and more. Their primary purpose, nevertheless, is identical in all cases: generating reliable, recurring income for shareholders.
Annaly is exclusive even by REIT standards, though. Moderately than holding rent-bearing or revenue-bearing real estate, this company’s business is a mix of managing mortgage loan service rights, buying and selling mortgage-backed securities issued by government agencies, like Fannie Mae or Freddie Mac, and what is actually engaging in rate of interest arbitrage between its own borrowing costs and the yields on the mortgage-based securities it holds.
It sounds crazy, and in some ways it’s. The business model is 100% tethered to the US mortgage market, which ebbs and flows in relation to ever-changing rates of interest. Sometimes, this business is predictable. Other times, it is not. And sometimes, even when it’s predictable, that does not necessarily mean there’s a simple way for a mortgage REIT to defend itself against looming setbacks.
At the tip of the day, though, Annaly Capital Management makes it work. Since its inception in 1996, this REIT’s total return has kept up with the S&P 500‘s gain for a similar timeframe, with most of Annaly’s net gains coming in the shape of what is often an oversized dividend that continues being paid, even when the broad market is on the ropes.
An advantageous disconnect
Don’t misread the message. For anyone needing consistent, predictable investment income, Annaly Capital Management could be a relatively tough ticker to count on. The payout doesn’t necessarily grow in line with inflation, if it grows in any respect. Sometimes, it shrinks, reflecting the continuing changes within the underlying mortgage loan market inside which this REIT solely operates. This ticker’s price changes — often being lowered — to make its yield more accurately reflect the prevailing, risk-adjusted yields at any given time.
The REIT’s underlying earnings (called earnings available for distribution) are also impacted by changes in rates of interest themselves, which may force the organization to regulate its dividend payments sometimes.
Annaly Capital Management continues to be an amazing defensive option within the event of market crashes, though, for a pair of various but related reasons: (1) This business doesn’t necessarily rise and fall with the stock market’s ebb and flow, and (2) the dividend behind Annaly’s current yield of 13% goes to be paid whatever the market’s performance within the foreseeable future.
That is higher than the S&P 500’s average annual gain, by the best way.
To be clear, owning a stake on this REIT doesn’t guarantee you may be higher off than not should stocks suffer a large pullback. There aren’t any guarantees on this business, in any case. Anything can and can eventually occur.
But that is not the purpose. Essentially the most you’ll be able to do is give yourself the very best probability of warding off the complete brunt of a sweeping sell-off. Annaly not less than offers you an inexpensive probability of doing that. Within the meantime, it’s dispensing a very good amount of money in an environment where growth stocks will not be logging an amazing deal of gains for some time.
Keep it in perspective
The defensive advantages listed here are obvious, besides, interested investors should keep things in perspective. Annaly is not well suited to function a significant, foundational holding in a long-term portfolio. And in case your current goal is simply to survive a market crash, it’s best to take into consideration picking up other forms of defensive trades, like gold or bonds.
Nevertheless, Annaly Capital Management is a top prospect for not less than a small sliver of your portfolio immediately, if only since it’s up to now faraway from the mainstream stock market yet still capable of manufacturing stock market-like net returns.
Must you invest $1,000 in Annaly Capital Management immediately?
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James Brumley has no position in any of the stocks mentioned. The Motley Idiot has no position in any of the stocks mentioned. The Motley Idiot has a disclosure policy.
Is the Stock Market Going to Crash? Who Knows? That is Why I’d Own This High-Yield Dividend Stock. was originally published by The Motley Idiot