There is one thing is on every investor's mind right now:
safety.
As of last week, fears of a global economic slowdown erased close
to $3 trillion inmarket value from U.S. stocks since July 22.
And the
Volatility Index (VIX)
-- considered a measure of "fear" in the market -- reached a recent
high of 48 on Aug. 8, after the S&P 500 dropped 17% in two
weeks.
So the question investors have now is how can you protect your
money while also earning a decent return? Should you cash out and
stick it in the bank? Purchase Treasurybonds ?
Most savings accounts pay less than 1%. And 10-Year Treasury
bonds
onlyyield 2.3%.
But I've found a low-risk security that's paying more than 7%,
making it an attractive alternative to low-yielding
Treasuries
and bank accounts.
You could evencall it a "double-safe" investment because it
provides two layers of safety. This doesn'tmean it can't lose
money, but at this point, it might just be the safest 7%
yield
in America.
You can see how well this security --
Annaly Preferred 7.875% Series A (NYSE:
NLY-PA
)
-- has held up against the broader market during the sell-off:
At its worst, Annaly's "Preferred A" stock lost about 8% (roughly
half the S&P's 17% fall). But at this level, theshares bounced
back quickly... while the S&P languished.
So what makes this security hold up in a rough market?
Thesepreferred shares are issued by
Annaly (NYSE:
NLY
)
, a
mortgage
real-estate investment trust or "M-REIT." This company borrows at
record-low rates and then invests in a basket of mortgage-backed
securities.
But isn't this risky? After all, investors were left with a bad
taste in their mouths when mortgage-backed securities tanked in the
financial crisis of 2008-09.
Well, NLY-PA's first layer of safety comes from the fact that its
parent company
invests in mortgages backed by government-sponsored agencies
Fannie Mae
and
Freddie Mac
.
You probably remember during the financial crisis three years ago,
the U.S. government bailed out Fannie and Freddie. These two
agencies still have their problems, but the mortgage securities
they issue are considered as credit-worthy as U.S. Treasuries. This
is because agency securities are backed by an implicit
guarantee
from the U.S. government.
Because Annaly's holdings continue to be backed by the U.S.
government, its portfolio is all but shielded from
credit risk
.
But this is not the only factor that plays into the safety of these
shares
. Its second layer of safety lies in the fact that you're investing
in
preferred shares
, not common stock.
Preferred shareholders have priority over common stock
shareholders. In short, they get paid first. And the preferreds
also have a $25
par value
-- the price at which the company can
call
them back. Because of this and their set
dividend
rate (NLY-PA pays $0.492 a share each quarter, for a yield of more
than 7%), these securities trade more like bonds than stock.
Meanwhile, Annaly is making more than enough to cover the payment
on the
preferred stock
. The trust reported in its last quarterly statement that it earned
$957 million in interest from its portfolio, easily covering the
$4.3 million it paid in preferred dividends.
Now, just because I think these securities are safe right now
doesn't mean they will be safe forever. For instance, rising
interest rates would increase borrowing costs for Annaly, which
would hurt
earnings
.
Action to Take -->
With the Federeal Reserve announcing plans to keep rates low until
2013 and the enormous cushion between earnings and preferred
dividends, I think the safety of these shares will continue well
into the foreseeable future. One important note -- the shares do
trade at a slight premium to their $25 par value. If called,
investors would see a slight
capital loss
from today's levels.
[
Note:
Since I first recommended Annaly's preferreds to subscribers of my
newsletter
High-Yield Investing
in February 2009, the shares have kept our money safe, paid a
reliable dividend through thick and thin, and kicked back a total
return of +51.1%. If you'd like to find out more about the
investments I'm finding for
High-Yield Investing
visit this link
.]
-- Carla Pasternak
Disclosure: Neither Carla Pasternak nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.