Inflation fears and rising interest rates are riling the
I've got a solution. But before I go into too much detail about
this idea, it's important to see exactly what's going on.
Treasury yields, which can serve as abenchmark for other bonds,
have risen in recent weeks. The 10-year Treasury now yields 3.7%,
up from 2.4% in early October. The problem is that as yields rise,
prices move down, reducing returns. As well, when rates rise, the
prices drop on lower-yielding bonds because they can't compete with
new bonds that offer higher yields.
Meanwhile, rising energy and food prices are beginning to
igniteinflation fears.Inflation is the enemy of fixed-income
investments like bonds and preferred stocks. The income they pay is
worth less as prices rise.
Many investors are running scared. Bond mutual funds saw the
biggest withdrawals in more than two years -- withdrawals of $8.6
billion in the seven days ended Dec. 15. That was a rise from $1.66
billion the week before, according to the Investment Company
Here's the good news. Thepanic selling isn't hitting every
Annaly Capital Management Preferred A (NYSE:
is one such security. It's thepreferred stock of
Annaly Capital Management (NYSE:
real estate investment trust (REIT)
that ownsmortgage securities backed by government-sponsored
enterprises such as Fannie Mae andFreddie Mac .
I know what you're thinking. Mortgages? Fannie Mae? It sounds
risky. But that's not the case.
Annaly's portfolio has virtually no credit risk. The company
basically borrows at low short-term rates, investing the money into
mortgage-backed securities. Because it invests only in securities
issued by government-sponsored agencies (backed by the federal
government), the securities carry an actual or implied "AAA"
rating, the same as U.S. Treasuries.
NLY-PA doles out quarterly payments of $0.492 a share, or $1.97 a
share annually. That translates to a 7.6%yield , and the highyield
is one reason the preferredshares have held up so well. Dividends
are taxed as ordinary income, so theshares are best held in a
Perhaps the best news is that withnet income $3.7 billion during
the past nine months, Annaly has been able to easily cover
preferred share dividends of $55.4 million during the same period.
Action to Take -- >
If you're a subscriber to
and bought theshares NLY-PA when I first recommended them back in
early 2009, you're now sitting on a nice gain of about 45%. If you
didn't, I'd keep an eye on the preferreds, but wouldn't buy just
are callable any time and are now trading at a premium to their
$25par value . If they were called tomorrow, you would lose out.
For new money, I think it's best to look for high-quality
bonds/preferreds trading belowpar or wait for a pullback to $25 or
-- Carla Pasternak
P.S. -- Have you heard about PCMs -- Perpetual Cash Machines?
This small group of securities carry average yields of 10.1%... yet
hardly anyone knows about them. Learn more about these rare gems
Disclosure: Neither Carla Pasternak nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.