A No Vote by the Fed is a Thumbs Up for High Yield

All the buildup. All the angst. Fed Chair Janet Yellen not talking publicly for the past 65 days. All the speculation. All the over-hyped rhetoric about how the financial world would stop spinning on its axis if a minuscule move of a quarter-point of one percent were to occur. And now that the curtain has been closed on the Fed show, what we find out is that the whole affair was as if someone pulled the minutes from the July Federal Open Market Committee (FOMC) meeting, blew the dust off and read them again verbatim.

In a nutshell, here’s what the Fed said… again. Employment gains are healthy, inflation is below the targeted 2%, housing is trending well, energy and commodities are weighing on global growth, exports are soft and economic uncertainty outside the United States warrants the appropriate action of maintaining the current status quo of a 0.0-0.25% Fed Funds rate and warrants fiscal accommodation until there is more clarity regarding inflation and overall price stability. Can we please move on now?

On the news of no rate hike, the yield on the 10-year Treasury spiked down from 2.3% to 2.1%, sending yield-sensitive sectors north in a dramatic move that put a firm bid under several beaten-down sub-sectors of the high-yield universe. Those sub-sectors had succumbed to investor resolve that the Fed was beginning a rate-tightening cycle that would be anything but one and done.

The news was a big shot in the arm for the hyper-sensitive agency mortgage real estate investment trusts (mREITs) that buy and own a portfolio of conforming fixed-rate residential home mortgages and then leverage that portfolio with the use of super-cheap money by a factor of 7x to generate dividend yields in excess of 10%. The big kahuna in the mREIT sector is Annaly Capital Management (NLY), 50% bigger in market cap than its nearest competitor.

The company is currently paying out a quarterly dividend of $0.30 per share, or $1.20 per year. With the shares trading at $10.50, the current dividend yield stands at 11.43% — better than five times what the 10-year T-note is paying and almost four times what the 30-year Treasury Bond is paying. It’s important to note the technical strength of NLY shares as well, trading back up through the 200-day moving average on rising daily volume.

Shares of Annaly Capital Management (NLY) are set to trade ex-dividend on Sept. 28, meaning that if investors buy and own shares prior to that date, they will be entitled to the $0.30 per share dividend. That one quarterly dividend is more cash received than what a 30-year T-bond pays in a year. In my world, there is no comparison and this is why NLY is a solid holding within the Cash Machine model portfolio and should be considered as a very timely long position for yield-hungry investors after the Fed effectively put any notion of a rise in interest rates in the near term on hold.

In case you missed it, I encourage you to read my e-letter column from last week about preferred stock as a source of yield. I also invite you to comment in the space provided below my commentary.