Annaly’s Variable Rate Preference Reaches New Highs, But Is It Right For You?

Annaly’s Variable Rate Preference Reaches New Highs, But Is It Right For You?

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Buzz Update Annaly’s Variable Rate Preference Reaches New Highs, But Is It Right For You?

Annaly Capital Management Inc. (NYSE: NLY) is a leading mortgage real estate investment trust (REITs), but it is the company floating rate preferred shares (NYSE: NLY-PF) that seem to be attracting investors’ attention.

These bond-like instruments make regular payments on the basis of a yield whose value had been fixed but which now “floats” with interest rates.

When the Federal Reserve raises rates, preferred stocks offer a higher yield as they adjust to the new environment. If you own a favorite Annaly with a 6.95% “coupon”, it can become a 7.25% payout. The amount “floats” depending on the direction of interest rates.

A preference like this, bought a few weeks or months ago, would now be worth more as an investment because the company has moved it from fixed to floating and the yield has increased. That’s why Annaly Floating Rate Preferred Shares just hit a new 52-week high price.

The other side of the coin is that things lose value when interest rates come back down and preferred stock rates come back down. An investor who bought at 7.5% and watches the yield drop to 6.25% is probably unhappy. The price of the instrument would also be lower.

You have to think carefully about a floating rate preference: do you expect the Fed not to pivot rates down again for a few years? If you own something like this, it’s a matter of keeping an eye on the Fed and the changes they make whenever they see fit.

Another issue to consider is that the payment of the preferred stock dividend must be made before the payment of the common stock dividend. That’s why they call it “favorite”.

Here is the daily price chart for Annaly’s Floating Rate Preference:


That’s a lot of volatility. The highs and lows from June to today are extraordinary. Right now it is at a high and trading above the 50 and 200 day moving averages.

Just for the record, here is Annaly’s common stock price chart:


It is trading well above early October lows, after breaking above the 50-day moving average, a sign of strength. But the 200-day moving average continues to decline, maintaining the overall downward trend.

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