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Safest big dividend in the stock market

Dr. Steve Sjuggerud, DailyWealth
0 Comments| July 5, 2010

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"I went to the bank with $1,000 today, to open a bank account,"my friend Lee told me. "The bank turned me down – they said it was too risky."

"Wait a minute, you went there to borrow $1,000?" I asked.

"No, I went there todeposit$1,000 – to open an account."

What has our world come to?

I can see how lending money to Lee could be risky. But Lee was handing the bank $1,000.

The bank has no risk... It only has upside. By accepting his account, the bank is starting a relationship that could go somewhere. The bank can make money off Lee's money. It will invest his cash and pay Lee no interest. And it can charge Lee fees – overdraft fees, ATM fees, whatever.

What has the world come to today, when a local bank won't accept $1,000?

Think about this...

Three years ago, Lee could have probably gotten a no-money-down mortgage for a few hundred thousand dollars from this same local bank. Banks were foolish risk-takers back then.

But today, Lee can't even open a bank account... I guess banks have burned themselves so badly, they've moved from being foolish risk-takers to being foolishly conservative.

The crazy thing is, now is the ideal environment for banking...

Banks can borrow money at ZERO percent, or very close to it. And banks can lend it out, risk-free in some cases, for 4% or more. This is the business of banking... Banks make their money on this interest rate "spread." And the spread is as wide as it gets right now.

As an investor, what you want is a bank that can earn this spread, a bank that owns no bad deals.

The ideal "bank" for this situation is what I call a "government-guaranteed virtual bank."

Annaly Capital (NYSE: NLY) is the flag-bearer here. It's like a bank. It earns an interest rate spread. But unlike a typical "bricks and mortar" bank, it doesn't have any branches – so I call it a virtual bank.

And unlike a typical bank, Annaly doesn't make loans to local businesses or on properties. Those have credit risk. Annaly has no credit risk. It invests 100% of its money in 100% government-guaranteed mortgage bonds. The government is stuck with the credit risk on everything it owns.

The numbers now are fantastic. Annaly currently pays a 16% dividend. I challenge you to find a dividend that high, that's this safe, anywhere in the world.

It's an ideal time to be a banker. The interest rate spread is ridiculously wide.

But most banks are doing ridiculous things... like turning down $1,000 deposits as "too risky." (They should take deposits like that and invest them in guaranteed mortgage bonds, like Annaly does.)

Meanwhile, super-safe Annaly trades very cheap, right at book value (which is roughly liquidation value in this case). I expect shares of Annaly will trade up to a 30% premium above book value once people figure this story out. That's a 30% gain in the stock, plus the 16% dividend... So you could see a 46% return here, in a year... safely.

"So what are you going to do?" I asked Lee, getting back to the story I started with.

"I don't know," he said. "I was hoping to build up some credit again. But for now I'll just use PayPal or something. I'm not sure what to do."

"Bricks and mortar" banks are apparently foolishly fearful right now. But virtual bank Annaly – with no credit risk – is not afraid. And right now, it is a great opportunity.

The safest, highest-return way to invest in the ideal banking environment is to buy shares of Annaly.

Disclosure: The author does not own positions in any stocks mentioned

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