Top Picks for 2010: Annaly Mortgage (NLY)

Adamo continues, "The company uses modest leverage -- about half what banks use -- to increase shareholder returns.

"With short-term rates likely to remain low for several years, Annaly's interest-rate spread will be wide and profitable. The company has never had a losing year.

"The market is still scared blind by anything that has the word 'mortgage' attached to it; so, the shares, which would normally yield about 7%, now yield nearly 15%, and the dividend has been growing!

"That will not always be the case. Since it is a real estate investment trust, it must pay out 90% of its earnings each quarter, so it can't hold reserves, like corporations do. Hence, the dividend will vary quarter to quarter.

"But using the average payout over the nearly 12 years it has been public, it would yield 10%. Moreover, the shares are less than half as volatile as the market, having a Beta of .45.

"Annaly's management is among the most savvy I've ever seen. They have called the contours of their business, as well as the credit and stock markets with extraordinary accuracy since long before the credit bubble appeared obvious to others.

"And they exploited that knowledge to shareholders' advantage. As credit markets normalize, I believe more investors will seek the safe income Annaly offers, and the shares will rise even more than the 27% they've risen this year. We recommend purchase of the stock up to $19 a share."

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