Annaly Capital Management Presses Its Credit Bets
Annaly Capital Management (NYSE: NLY) is a mortgage real estate investment trust (REIT), which differs from the more traditional REITs that manage office or retail properties. These other REITs generally buy properties like buildings and strip malls and make their money from rental income. Mortgage REITs have a different strategy: They are pure investors, buying financial instruments such as mortgage-backed securities, and making their money on the interest that these instruments pay.
Historically, mortgage REITs have tended to focus on buying mortgage-backed securities that were issued by either Fannie Mae or Freddie Mac. These securities are guaranteed by the U.S. government, which means there is no risk to investors that they won't get paid. If one of the underlying mortgages defaults, the mortgage insurer or the government will make the payments. So from an investor's standpoint, the only risk is interest rate risk.
So how are mortgage REITs like Annaly able to pay such a high dividend yield on what would otherwise be considered low-risk investments? Read on.
Source Fool.com
