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No. of Recommendations: 17
I've held NLY for about 15 years, so I've seen the share price and dividend rise and I've seen them fall as well. I've seen the company evolve from a pure MBS play focused on high quality securities with an implied government backing, to a more diversified and, possibly, slightly riskier model where they also invest in things that do not have an implied government backing. I bought and continue to hold NLY as an income stock, not a growth stock, and I hold it in an account where it goes DRIP DRIP DRIP. My position has slowly grown over the years. Not like a great growth stock, but a heck of a lot better than a bad growth stock :). I too could write an article making the case that this is not a growth stock and pick out a good growth stock to compare it too. But I could also write an article making the case that this is an excellent growth stock by comparing it to a flea-ridden dog.

NLY's dividend is typically about 10% of share price. Sometimes a bit more, sometimes a bit less, but typically the share price adjusts in response either to the dividend or to the anticipation of what the dividend will be. Looked at over time, this pattern holds up pretty well, in part because NLY has been a no-drama company for a long time. Importantly, the absolute dividend depends on how well they read the tea leaves to anticipate where interest rates will be in the future and make decisions about hedges and swaps accordingly. I don't follow the company day in and day out, or even quarter to quarter. But over time they have proven pretty adept at positioning themselves for the direction in which rates will go and where they will be at various points in the future. Have they always hit it out of the park? No, of course not. The environment we have been in for quite a while now is a challenging one, with interest rates held artificially low for far longer than many economists expected. When the dividend has dropped, the share price has followed. Recently it has risen and the share price has followed.

So, let's say you are a sensible investor with a time horizon that exceeds 5 years. Or 10 years. Or 20 years. NLY has been a pretty solid investment, particularly if you have held it in a tax advantaged account. If you have the luxury of picking your exit point so that you can wait for the share price to get a bit or more than a bit above where you purchased it, you can do pretty well. You can have an asset that compounds its growth and does so by about 10% annually, and maybe just maybe you can amplify that growth with an increased share price. But to be clear, you have to be willing and able to hold through the drops in share price and let that dividend keep on coming in and compounding the value of your investment over time. Eventually, when the dividend climbs and share price follows, as it has recently, you might decide to take some money off the table or close out your position entirely. When you do so, those shares you picked up with that set-it-and-forget-it Dividend Re Investment Plan at $8 and change look pretty sweet. Right now they are effectively paying a 15% dividend based on what they cost you and you can sell them for a tidy profit. The ones you picked up via DRIP at $20+, not so much.

Yes, one could make a bear case by picking a purchase price well above the current share price at some arbitrary point in the past, but the converse is also true. The stock is currently trading at the approximate mid-point of its historical range. Will it go higher? Almost certainly. Will it go lower? Almost certainly. Will it keep paying a dividend worth approximately 10% of whatever the share price is at the time? Almost certainly. Will the company make appropriate hedges and swaps, correctly predicting the timing and magnitude of interest rate changes? I am less certain of that at any given time, but they do have a pretty solid track record over time. And at the end of the day, I guess part of the question has to be whether you can appropriately diversify your portfolio AND consistently do better than a 10% return on your investment. In my case, my initial entry point is a bit higher than the current share price. BUT I am still crushing the S&P (with dividends reinvested) over the same period with an annual return of 8.88% vs 6.32%. In fact, NLY beats the S&P handily in all but a very few quarters where NLY's share price was unusually high AND the overall market had taken a serious downturn.

Finally, Yes, I do have some stocks that have performed much better than NLY. And yes, I have some that have done much worse. You probably do too. When I look at all of my assets, stocks, bonds, mutual funds, and real-estate, and I think about diversification and risk, continuing to hold NLY as a small part of the overall mix seems like a no-brainer. I might plan on selling it sometime in the next 20 years, but I can wait until the share price appreciates and rest comfortably knowing that my money is working hard while I wait.

Regards,

Dorset
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