Market Edge: The Right (and Wrong) Ways to Buy Dividend Stocks
By Charles Sizemore, Chief Editor, TheBanyanEdge
You can trade anything. And over the years, I pretty much have.
Stocks, crypto, Nicaraguan beachfront lots… When it comes to speculating, pretty much nothing is off the table.
But with longer-term dividend investments, I tend to be a lot pickier. This is something I’m depending on for regular income to pay my bill. So, as is the case with Charles Mizrahi’s “M-Class” stocks, quality matters. These are stocks I want to be comfortable owning potentially for the rest of my life. I want to gift them to my still-yet-to-be-born grandchildren someday.
I’ll illustrate with two examples.
I’ll start with mortgage REIT Annaly Capital Management (NLY). Annaly owns a leveraged portfolio of mortgage bonds and related securities and is considered by many to be the blue chip in its space. It’s one of the oldest mortgage REITs in existence, and management has proven themselves to be very capable in navigating an extremely treacherous market niche.
At today’s prices, the shares yield a massive 16.7%. Good luck finding many stocks with higher yields.
There’s just one problem. If this is a stock you’re depending on to pay your regular monthly bills … well, get used to a feast-or-famine existence.
When Annaly is in a favorable interest rate environment, it has the ability to massively expand its dividend. And that’s exactly what it did during the last favorable cycle, between 2006 and 2009 when it raised its quarterly dividend a staggering 650%, from $0.40 to $3.00.
The problem is, not every interest rate environment is so favorable … and the quarterly payout is now more than 70% below its old 2009 highs.
Let’s compare that to one of my all-time favorites — a stock I’ve owned personally for the majority of my adult life — conservative retail REIT Realty Income (O). Realty Income owns a vast, sprawling portfolio of shockingly boring properties like pharmacies and convenience stores, and its dividend yield is a much more modest 4.7%.
O is boring and modest, but stable. The dividend stair steps higher every quarter with zero drama. While I can’t tell you Realty Income’s dividend is “risk-free” (only U.S. government securities hold that distinction), it’s hard to imagine something that would cause Realty Income to chop its payout, short of nuclear war or zombie apocalypse.
Now, let me be clear. You can potentially make a lot more money in Annaly than in Realty Income. When the right conditions are in place, Annaly practically has a license to mint money. Total returns of 10 times your money in just a couple years is absolutely possible.
You can legitimately get rich quick in a mortgage REIT … IF you time it right. But that’s just it. You have to time it right, and there are a lot of variables you can’t control.
So, a stock like Annaly should be considered a fantastic candidate for a trade, or even a multiyear trade.
But it’s not an income investment, or at least it’s not one I’d want to risk my retirement on. For that part of my portfolio, I’ll take a staid workhorse like Realty Income, thank you very much.
When my family settles around the table after our big Thanksgiving dinner tomorrow, I can guarantee you one thing… One of my family members will ask … what should I invest in for 2024? My answer will be the same as it is every year. Quality businesses in a mega trend, run by rock-star CEOs, […]
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