Earn 10.4% From This High-Yield Trust
Today’s chart highlights one of the safest, highest-yielding investments around: high-yield trusts.
High-yield trusts get little coverage in the press. Despite the meager coverage, though, some of these names yield as much as 10%, 12%, even 15%.
Take, for instance, Annaly Capital Management, Inc. (NYSE:NLY). This partnership owns a vast collection of real estate mortgages. And while I doubt you’ve heard of it, I love the name for a couple of reasons.
First, it cranks out profits. Annaly works in the same way as a regular bank: it borrows money at a low interest rate and lends out at a higher one. For collateral, most of these loans are backed up by high-quality properties.
Annaly, though, has no brick-and-mortar branches. That means no ATMs, no bank tellers, and no walk-in customers. This lack of overhead makes the business far more profitable than other lenders.
For this reason, insiders have flocked to high-yield trusts. Famed bond investor Bill Gross loves these firms for their secure loans and conservative leverage. Annaly, he noted, borrows $4.00 to $6.00 for every dollar in equity. In contrast, most banks borrow between $6.00 and $9.00. (Source: “Bill Gross: Why Interest Rates Must Rise,” Barron’s, April 9, 2016.)
“Bond King” Jerrery Gundlach loves them, too. At the Sohn Hedge Fund Conference last year, he praised high-yield trusts. He even prefers them over dividend stocks like utilities. (Source: “The bond kings agree: mortgage REITs are worth a look,” MarketWatch, May 6, 2016.)
That quiet success has resulted in outsized returns for investors. As you can see in the chart below, Annaly has crushed the broader market over the years. Even through the real estate crisis, this firm kept cranking out profits.
The trust gushes income as well. Because of how the firm has legally structured itself, management must pay out most of their profits to partners. Today, Annaly pays a quarterly distribution of $0.30 per unit, which comes out to an eye-poping 10.4% yield.
Source: StockCharts.com
I expect those returns to continue. Annaly’s profits come from the spread between short- and long-term interest rates. That gap has opened up in recent months, which should pad the bottom line.
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Overall, high-yield trusts offer real income potential. Unlike normal dividend stocks, their payouts can be volatile. But if you want extra cash flow, then take a second look at Annaly Capital Management.