If you’re like most investors, you love the long-term rise of the market. You just don’t want to suffer sometimes (and sometimes it hurts). Issue? You never know when disaster will strike. The best you can hope for is to ease the suffering once it arrives. And the best way to do that is with the right position before the big pullback.
With that in mind, there is one name in particular that I think we have right now in case of a market crash. that Analytical Capital Management (NYSE: NLY).
Ever heard of that? Don’t sweat it. You are not alone. It’s not exactly a household name, and with a market cap of just $10 billion, it doesn’t seem like it garners a great deal of financial media attention.
However, they do their job for investors very well.
What is Annaly Capital Management?
Annaly Capital Management is a real estate investment trust (REIT). As the name suggests, a REIT is an organization that focuses on real estate. REITs own properties ranging from hotels and office buildings to malls, apartment buildings, and more. However, the main objective is the same in all cases: to generate reliable and recurring income for shareholders.
Annaly is unique even by REIT standards. Instead of renting real estate or real estate, this company’s business is a combination of managing mortgage credit service rights, buying and selling mortgage-backed securities issued by government agencies, such as Fannie Mae or Freddie the Tigerand what essentially involves interest rate arbitrage between the cost of borrowing itself and the yield on the mortgage-based securities it holds.
It sounds crazy, and in some ways it is. The business model is 100% tied to the United States mortgage market, which ebbs and flows in relation to ever-changing interest rates. Sometimes, this business is predictable. Other times, no. And sometimes, even if it’s predictable, that doesn’t mean there’s an easy way for mortgage REITs to defend themselves against a downturn.
But, at the end of the day, Annaly Capital Management makes it work. Since it was established in 1996, the total return of this REIT has been rising with S&P 500‘s gains for the same timeframe, with most of Annaly’s net gains coming in the form of what are usually large dividends that continue to pay, even when the big market is on the ropes.
A profitable disconnect
Don’t misread the message. For anyone who needs consistent and predictable investment income, Annaly Capital Management can be a tough ticker to trust. Payments do not always grow in line with inflation, if grow at all. At times, it shrinks, reflecting ongoing changes in the underlying mortgage loan market in which these REITs only operate. These ticker prices change — often discounted — to make their returns more accurately reflect their risk-adjusted returns at a given time.
The REIT’s underlying earnings (called earnings available for distribution) are also affected by changes in interest rates itself, which may force the organization to adjust dividend payments from time to time.
Annaly Capital Management is still a good defensive option in the event of a market crash, but for several different but related reasons: (1) This business does not always rise and fall with the ebbs and flows of the stock market, and (2) ) dividends behind Annaly’s current yield of 13% will pay regardless of market performance in the foreseeable future.
That’s better than the S&P 500’s average annual gain.
To be clear, owning shares in these REITs does not guarantee that you will do better than if the shares were to go down. There are no guarantees in this business, after all. Anything is possible and will eventually happen.
But that’s not it. The least you can do is give yourself the best chance of fending off a full sell-off sweep. Annaly at least gave him a fair chance to do so. In the meantime, it’s dishing out a good amount of cash in an environment where growth stocks may not deliver big gains for some time.
Keep it in perspective
The defensive benefits here are clear, but even so, interested investors should keep it in perspective. Annaly is not suited to be a major shareholder in a long-term portfolio. And if your current goal is simply to survive a market crash, you should think about choosing another defensive trade, such as gold or bonds.
However, Annaly Capital Management is a top prospect for at least part of your portfolio right now, if only because it is far from the main stock market but can still generate net returns like the stock market.
Should you invest $1,000 in Annaly Capital Management right now?
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Will the Stock Market Crash? Who knows? That’s Why I Own These High Dividend Stocks. this was originally published by The Motley Fool
