Insiders Are Loading Up on This High-Yield Stock
Yield-seeking investors haven’t had the best of luck in recent years. Fixed-income investments didn’t pay much, and the most well known dividend stocks have gotten quite expensive. However, for those who are willing to dig into the not-so-hot sectors of the stock market, it’s still possible to find solid dividend-paying companies with above-average yields.
Case in point: Annaly Capital Management, Inc. (NYSE:NLY) runs a very profitable business and offers investors a generous dividend yield of 9.94%.
To put this in perspective, the average S&P 500 company is yielding just 1.89% at the moment. So, if investors purchase NLY shares today, they would be locking in a yield that’s more than five times the benchmark’s average.
Of course, if yield is the only criterion, income investors would be going after the stocks that are paying 20%, and even 30%. But they are not. This is because high-yield stocks are not known for their dividend safety. Quite often, the main reason behind a company’s sky-high yield is a massive downturn in its stock price. And the reason behind the stock’s downfall could be investors’ concerns about its dividend safety. For income investors with a long-term horizon, these kinds of yields are not worth chasing.
The good news is that Annaly Capital is not one of the “sucker yields.” The stock is actually doing better than fine. In the last 12 months, NLY shares surged 22.2%.
High-Yield Stock Backed by a Profitable Business
Annaly Capital can pay oversized dividends because of its profitable business. The company is structured as a mortgage real estate investment trust (mREIT). It invests in both residential and commercial mortgages. By the end of the second quarter, most of the company’s assets were invested in agency mortgage-backed securities (MBS). Agency MBS are the relatively safer instruments in the real estate business because they are backed by the U.S. government.
The company makes money by collecting interest payments from these investments. Right now, the levered return of Annaly’s agency MBS portfolio is between 10% and 12%. Thanks to its profitable operations, the company can pay generous dividends to investors. (Source: “Second Quarter 2017 Investor Presentation,” Annaly Capital Management, Inc., August 2, 2017.)
Moreover, management is willing to put money where their mouth is.
Public companies often have some sort of management ownership requirement. At Annaly Capital, its senior management—including Chief Executive Officer, Chief Financial Officer, Chief Investment Officer, Chief Credit Officer, and Chief Legal Officer—have all agreed to voluntarily increase their ownership positions in NLY stock beyond the requirements.
In particular, CEO Kevin Keyes voluntarily increased his commitment by 50% to $15.0 million.
And it’s not just upper-management members who are willing to own the company’s shares. As a matter of fact, more than 40% of Annaly’s total employee base are shareholders of NLY stock.
Insider ownership stories like this may not make headlines, but they do represent a big vote of confidence. Think about it: if you are not optimistic about the company’s future, would you put tens of millions of dollars into the stock?
At the same time, higher insider ownership aligns the interest of shareholders with management. Because of their sizable stakes in the company, management will be more likely to make decisions that could create shareholder value in the long term.
That’s why, for investors looking for a high-yield stock to boost their portfolio returns, Annaly Capital Management should be near the top of their watch list.