Annaly Capital Management Inc.: Not Suitable For Retirement Accounts

Although some might disagree, I believe that investors either in retirement, or close to becoming retired, should be a little more conservative with how their portfolios are positioned. This position is primarily predicated on the reality that investors in retirement do not have the luxury of the time often needed to recover from bad decisions, or from bad market environments in general.

In conjunction with this more prudent and conservative portfolio positioning, retired investors are best served to take a long-term buy-and-hold investment strategy. Consequently, this would also apply that retired investors should favor consistent and predictable performance over inconsistent and erratic performance. This further supports the prudence of investing in blue-chip high-quality dividend growth stocks for the equity portion of their portfolios.

I believe the biggest advantage that blue-chip dividend growth stocks offer retired investors is a predictable and consistent growth of dividend income regardless of market price behavior. Common sense, and historical reality, clearly validates the prudence of steady dividend growth over highly volatile market price action. With dividend growth stocks, the income stream is highly predictable whereas the capital appreciation component fluctuates along with emotionally charged market reactions.

Therefore, I am not in favor of chasing yield in retirement accounts, especially in highly volatile mREITs.To be clear, this particular asset class is volatile and erratic with both price and dividends. With that said, many mortgage REITs (mREITs) are currently offering extremely high double-digit yields that capture the attention of income-seeking investors such as retirees.  The following stock price quotation courtesy of Seeking Alpha shows that the popular mREIT, Annaly Capital Management (NLY), statistically speaking appears to be an extremely attractive dividend stock with a very low valuation and a high dividend yield (highlights in yellow are mine).

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Wow, an investor might conclude, a dividend yield of almost 12% and a P/E ratio of only 8 which is approximately half the valuation that most stocks trade at. Since I am looking for income, this is almost too good to be true – or is it? Now, I understand (especially considering today’s generally low-interest rate levels), how investors might become smitten with double-digit yields. On the other hand, I believe if those same investors look closer under the hood, they might have a different attitude and perspective.

Annaly Capital Management Historical Performance

For starters, a bottom-line examination of Annaly’s cumulative dividend production over the last couple of decades is nothing short of awesome. A $10,000 investment made on December 31, 1999, would have generated $36,525.79 in dividends through June 2019. That is approximately 10 times the dividend income that an equal investment in the S&P 500 would have produced. The average retiree would be quite happy with those long-term dividend income results.

However, I would question whether the average retiree would have been willing to hold onto this company over that timeframe so that they could have achieved those dividend income results. A closer look suggests that a buy-and-hold approach to Annaly since 2000 would have presented several challenges. Here is the full dividend record:

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Disclosure: No position.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks ...

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