Not a subscriber? Click here to learn
more.
|
| Home | About Us | Resources | Archive | Free Reports | Market Window |
The Safest Big Dividend in the MarketBy
Friday, July 2, 2010
"I went to the bank with $1,000 today, to open a bank account," my friend Lee told me. "The bank turned me down – they said it was too risky."
"Wait a minute, you went there to borrow $1,000?" I asked.
"No, I went there to deposit $1,000 – to open an account."
What has our world come to?
I can see how lending money to Lee could be risky. But Lee was handing the bank $1,000.
The bank has no risk... It only has upside. By accepting his account, the bank is starting a relationship that could go somewhere. The bank can make money off Lee's money. It will invest his cash and pay Lee no interest. And it can charge Lee fees – overdraft fees, ATM fees, whatever.
What has the world come to today, when a local bank won't accept $1,000?
Think about this...
Three years ago, Lee could have probably gotten a no-money-down mortgage for a few hundred thousand dollars from this same local bank. Banks were foolish risk-takers back then.
But today, Lee can't even open a bank account... I guess banks have burned themselves so badly, they've moved from being foolish risk-takers to being foolishly conservative.
The crazy thing is, now is the ideal environment for banking...
Banks can borrow money at ZERO percent, or very close to it. And banks can lend it out, risk-free in some cases, for 4% or more. This is the business of banking... Banks make their money on this interest rate "spread." And the spread is as wide as it gets right now.
As an investor, what you want is a bank that can earn this spread, a bank that owns no bad deals.
The ideal "bank" for this situation is what I call a "government-guaranteed virtual bank."
Annaly Capital (NLY) is the flag-bearer here. It's like a bank. It earns an interest rate spread. But unlike a typical "bricks and mortar" bank, it doesn't have any branches – so I call it a virtual bank.
And unlike a typical bank, Annaly doesn't make loans to local businesses or on properties. Those have credit risk. Annaly has no credit risk. It invests 100% of its money in 100% government-guaranteed mortgage bonds. The government is stuck with the credit risk on everything it owns.
The numbers now are fantastic. Annaly currently pays a 16% dividend. I challenge you to find a dividend that high, that's this safe, anywhere in the world.
It's an ideal time to be a banker. The interest rate spread is ridiculously wide.
But most banks are doing ridiculous things... like turning down $1,000 deposits as "too risky." (They should take deposits like that and invest them in guaranteed mortgage bonds, like Annaly does.)
Meanwhile, super-safe Annaly trades very cheap, right at book value (which is roughly liquidation value in this case). I expect shares of Annaly will trade up to a 30% premium above book value once people figure this story out. That's a 30% gain in the stock, plus the 16% dividend... So you could see a 46% return here, in a year... safely.
"So what are you going to do?" I asked Lee, getting back to the story I started with.
"I don't know," he said. "I was hoping to build up some credit again. But for now I'll just use PayPal or something. I'm not sure what to do."
"Bricks and mortar" banks are apparently foolishly fearful right now. But virtual bank Annaly – with no credit risk – is not afraid. And right now, it is a great opportunity.
The safest, highest-return way to invest in the ideal banking environment is to buy shares of Annaly.
Good investing,
Further Reading:
As Steve has pointed out before, the huge opportunity we have right now in Annaly is the result of government "foolishness." Essentially, the U.S. government is lending to banks at about 0% and then borrowing from them at 4%. It's free money. And that's not the only boondoggle out there right now...
Market NotesTHIS IS A MASSIVE BREAKDOWN WORTH WATCHING The breakdown we've been expecting from Freeport-McMoRan (FCX) is here.
Longtime DailyWealth readers know mining giant Freeport-McMoRan is one of our "must watch" stocks. FCX is the world's largest publicly traded copper company. Since the price of its chief product rises and falls with the pace of global economic activity, FCX shares are a great "instant read" on what's happening in the economy. It's also a stock we've been warning you about for months.
FCX enjoyed a huge 2009 as investors flocked to assets that benefited from the government's E-Z-Credit goosing of the economy. Shares skyrocketed more than 240% off their lows. But since peaking early this year, the stock has been locked in a bearish series of "lower highs and lower lows." And just yesterday, FCX registered a downside breakout to reach its lowest low in nine months.
This horrid price action from a leading copper producer is nothing but bearish for the global economy. And for classic trend-following traders, it's a clear downtrend to bet on.
|
In The Daily Crux
Recent Articles
|
