The Safest 7% Yield in America

Article by Carla Pasternak,  DividendOpportunities

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 in market value from U.S. stocks since July 22nd.

And the Volatility Index (VIX) — considered a measure of “fear” in the market — reached a recent high of 48 on August 8th, after the S&P 500 dropped 17% in two weeks.

So the question investors have now is how do you protect your money while also earning a decent return? Cash out and stick it in the bank? Purchase Treasury bonds?

Most savings accounts pay less than 1%. And 10-Year Treasury bonds only yield 2.3%.

But I’ve found a low-risk security, and it’s paying more than 7%, making it an attractive alternative to low-yielding Treasuries and bank accounts.

You could even call it a “double-safe” investment because it provides two layers of safety. That doesn’t mean 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 that level, the shares bounced back quickly… while the S&P languished.

So what makes this security hold up in a rough market?


These preferred 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 that risky? After all, investors were left with a bad taste in their mouths when mortgage-backed securities tanked in the last financial crisis.

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 of 2008-09 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. That’s 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 that’s 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 that and their set dividend rate (NLY-PA pays $0.492 per 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 forever. For instance, rising interest rates would increase borrowing costs for Annaly, which would hurt earnings.

But with the Fed 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 High-Yield Investing advisory 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.]

Good Investing!

Carla Pasternak’s Dividend Opportunities

P.S. — Don’t miss a single issue! Add our address, [email protected], to your Address Book or Safe List. For instructions, go here.

Disclosure: Carla Pasternak hold shares of NLY-PA as part of High Yield Investing’s model portfolios.

NFP Reveals Zero Change in US Employment


This afternoon’s Non-Farm Payrolls (NFP) data was shocking to forex traders at the time of its publication. Expectations had priced in a growth of roughly 74,000 jobs, down from last month’s 117,000. The actual figure was a big fat doughnut hole in employment change across the United States.

The report revealed zero change in jobs for the past month. That is: no growth, no contraction (i.e. stagnation). Investors were clamoring for safety – thereby driving the USD higher – after the news was published and political pundits are beginning to crawl out of the woodwork chastising President Obama for pushing back his jobs plan speech after a dispute with House Speaker John Boehner (R-OH) after its timing was found to coincide with televised debates between Republican presidential hopefuls.

Read more forex trading news on our forex blog.

Swiss Full-Time Employment Drops in Q2


A quarterly report from the Federal Statistics Office in Switzerland noted a rapid decline in full-time employees working in the Swiss economy. First quarter data had full-time employment at 4.11M, and expectations were for zero change in that figure for the second quarter. The results were harrowing.

A decline from last quarter’s 4.11M to a second quarter reading of 2.77M revealed a sizeable dip in employment across the Swiss economy. The data has so far tangled the Swiss franc (CHF) up in a foray for direction, marring its growth with visible swings of value today. Employment tends to be one of the strongest corollaries to a nation’s economic growth, making this figure ominous in its implications for the next few months in Switzerland.

Read more forex trading news on our forex blog.

Capital Expenditures in Japan on the Decline


Japanese businesses appear to have downsized their level of investment. A report out this morning from the Japanese Ministry of Finance found that capital expenditures by private businesses declined 7.8% in the second quarter.

The report is presented in an annualized format, but covers an entire quarter. There was an expectation of 1.1% growth in this figure, making the actual results all the more detrimental. This decline poses an ominous challenge to the Japanese economy as business capital expenditures represent a sizeable portion of domestic investment. The reverberations may put a significant dent in Japan’s GDP growth over a longer period.

Read more forex trading news on our forex blog.

Barclays’s Ted Lord Says ECB May Cut Rates on Weakness

Sept. 2 (Bloomberg) — Ted Lord, head of European covered bonds at Barclays Capital, discusses the outlook for European Central Bank monetary policy and the potential for a recession in the euro zone. Lord speaks from Hong Kong with Linzie Janis on Bloomberg Television’s “First Look.” (Source: Bloomberg)

Feldstein Says Euro `Experiment’ Is a Proven Failure

Sept. 2 (Bloomberg) — Martin Feldstein, a professor of economics at Harvard University, talks about the euro-zone economy and European Central Bank interest rates. He speaks from Cernobbio, Italy, with David Tweed on Bloomberg Television’s “Countdown.” (Source: Bloomberg)

FX Fundamental Weekly Preview – Central Bank Meetings Galore


The shortened week in the US will not deter central bank interest rate decisions from the ECB, BOE, BOJ, RBA, and BOC. All eyes will be focused on the ECB press conference as Jean-Claude Trichet will likely be asked to clarify his comments from last Monday which he gave before the European Parliament. Additional questions remain as to the circumstances surrounding the Troika’s early departure from Athens today.

Trichet suggested inflationary pressures in the euro zone may be declining and this week’s sharp drop in the value of the EUR/CHF may be a result of market players taking a second look at the next expected ECB interest rate increase which is forecasted to come in Q4 after Mario Draghi takes over the helm of the ECB. Perhaps the ECB would do well to take a page from Brazil’s playbook by backpedaling away from the ultra-hawkish monetary policy stance the ECB has worked so diligently to frame in investors’ minds. An interest rate reduction could go a long way toward supporting the sluggish rates of growth in in Europe. Trichet will also be questioned on the scaling back of the ECB’s bond purchases to EUR 6.651 bn, its smallest amount yet since the ECB began buying Italian and Spanish debt.

Additional central bank meetings will take place throughout the week but it may be the SNB which highlights the week as investors seem intent on testing the resolve of the Swiss central bank to weaken the CHF given the 1% decline in the EUR/CHF today.

Today’s non-farm payrolls report takes extra importance to cement or dispel hopes of QE3. A release below expectations of +74K will likely fuel additional speculation in the forex trading blog community. With the winding down of the summer vacation season liquidity should return to normal levels next week as forex trading desks will begin to operate with a full staff.

Read more forex trading news on our forex blog.

UBS’s Hatheway Says ECB May Reverse Rate Increases

Sept. 2 (Bloomberg) — Larry Hatheway, chief economist at UBS Investment Bank, talks about European Central Bank monetary policy and the future of the euro zone. He speaks with Maryam Nemazee and David Tweed on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)