Annaly's Floating-Rate Preferred Hits New High, But Is It Right For You?

Annaly Capital Management Inc. NLY is one of the major mortgage real estate investment trusts (REITs), but it’s the company’s floating-rate preferred shares NLY that seem to be attracting investors’ attention. 

These bondlike instruments make regular payments based on a yield that had been fixed in value but now “floats” with interest rates.

When the Federal Reserve takes rates higher, the preferred shares pay a greater yield as they adjust to the new environment. If you own an Annaly preferred with a 6.95% “coupon,” it may become a 7.25% payment. The amount “floats” depending on the direction of interest rates.

A preferred such as this, purchased a few weeks or months ago, would now be worth more as an investment because the company switched it from fixed to floating and the yield has moved higher. That’s why the Annaly floating-rate preferred shares just hit a new 52-week-high price. 

The other side of the story is that the stuff loses value when interest rates head back down and the preferred’s rate heads down. An investor who bought in at 7.5% and watches as the yield drops to 6.25% is probably unhappy. The price of the instrument would likely be lower as well.

You have to think carefully about a floating-rate preferred: Do you expect the Fed will not be pivoting rates back 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 it makes whenever it deems it appropriate.

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

Here’s the daily price chart for Annaly’s floating-rate preferred:

That’s a lot of volatility. The ups and downs from June through the present are extraordinary. Right now, it’s sitting at a higher high and trading above the 50-day and 200-day moving averages.

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

It’s trading well off of the early October lows, having crossed above the 50-day moving average, a sign of strength. But the 200-day moving average continues to decline, keeping the overall trend down.

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