Wednesday, September 28, 2011

NLY Watch

High dividend shares be wonders to behold. I mean, it's raining free money, just for owning the stock. What's not to like?

One of my favorite high-div plays is Annaly Capital Management Inc. (NLY), a real-estate investment company. it pays out quarterly, and today went ex-dividend on a 14.3% annualized payout.

sym phase trend adx   200/50 40/10

But this morning, NLY went ex-dividend and gapped down 3.1%, below the 20-day Donchian price channel, into bear phase.

And that's the problem with income stocks. When the issue goes ex-dividend, the price drops by about the same amount. The dividend to be paid amounts to about 3.6%.

That characteristic of high-dividend plays makes them almost impossible to analyze on the chart. Today's drop into bear phase means absolutely nothing about the stock's future prospects.

NLY is trading at the low end of the present sideways trading range that has been in effect since October 2009. The range has been seriously broken only once, with a very sharp downward break after the March 2009 dividend.

I owned NLY at the time, as I do today. On the chart, the initial decline looked like the normal dividend drop. But in this case, it just kept on dropping, and the nature of the decline became apparent only when it was too late to avoid a large shrinkage of the capital value of the shares.

NLY, of course, came back, but there's never any guarantee of that it will -- with any stock.

I can only hold NLY and other ex-dividend play by making them something outside of my chart-based trading system. And that leaves me unable to make any decisions about whether to sell or not in order to protect my base capital. With NLY, I become the worst thing in the world for a private trader: A buy-and-hold investor.

Are there alternatives? Sure. It's easy to construct covered call plays that will return 2% a month -- 24% a year.

Covered call premiums are less reliable than dividends, but the stock can be charted and analyzed, and I can formulate rules for selling in order to avoid capital loss. With dividends, I can only rely on faith that the stock will hold its value and that my fine high dividends won't be wiped out by a capital loss.

Faith-based trading. Not my favorite approach.


  • phase: 20-day price channel phase, with green for bull trend, red for bear trend and yellow for neutral trend.
  • trend: Price direction, green for higher highs and higher lows, red for lower highs and lower lows, yellow for neither.
  • adx: Average directional index location, indicating the strength, or the temperature, of the trend. Orange for 40 or greater, aqua (light blue) for 25 and up but below 40, magenta (light purple) for 20 and up but below 25, and brown for anything below 20. (Mnemonic: Orange for the overhead sun, blue for the surrounding sky, magenta for sunset on the horizon and brown for the earth.)
  • 200/50: The moving average cross, green for the 50-day ma above the 200, red for below and yellow for closely aligned.
  • 40/10: The moving average cross, green for the 10-day ma above the 40, red for below and yellow for closely aligned.

About my trading methods

Read a detailed explanation of my analysis method, including trading rules.


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

The trader’s greatest sin is inaction. Sleeper, awake! Seize the Nietzchean moment. Roll out of bed and trade.

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