Annaly by Malcolm Berko on Creators.com

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Stolen Wallet Leads to a Huge Headache Dear Mr. Berko: My wallet was stolen a year ago, and most folks have no idea what a job it has been to get my life back in order. The credit agencies have me listed as a bum, even though I pay all my real bills, and I still get calls from vendors …Read more. Kick That Broker to the Curb Dear Mr. Berko: We are 74 and 76. We've used the same broker since early 2002, and our account, which was worth $765,000 back then, is barely worth $705,000 today. Our mutual funds haven't done well, and we've lost money in various unit trusts. Our …Read more. Would the Real Malcolm Berko Please Stand up? Dear Mr. Berko: What stock exchange firm do you work for? Is it true that you accumulate a big holding of a stock for all of your clients and then write good things about that stock in your newspaper column so that millions of investors will read …Read more. Natural Gas Firm Looking Like a ‘Buy' Dear Mr. Berko: A long-time friend of mine (name omitted) who says he knows you well has had some good successes in the market during the past six years buying oil and gas limited partnerships, high-yielding convertibles and preferreds. He just …Read more.

Annaly

Dear Mr. Berko: I purchased 900 shares of Annaly Capital Mortgage at $17.20 when you recommended it last November. The yield is fantastic — 17.3 percent — and I already got a dividend, which, as you also recommended, I reinvest each time there's a dividend payment. I was really shocked when my broker told me that there will be a charge for reinvesting the dividend. They are going to charge me $3 every time my Annaly dividend is reinvested. When I questioned the charge, my broker said that it cost his firm that much each time a dividend is reinvested. That really makes me mad because I gave that firm nearly $7,000 in commission in 2009. Is this the norm in the industry? I have two questions: How is it possible for a mortgage REIT to pay 17.3 percent when mortgages are 5 percent, and can you explain a good till cancel order? — K.K., Wilmington, N.C.

Dear K.K.: Many brokerages charge a fee to reinvest dividends and that really frosts me. Considering the commissions you paid, I'd tell the broker to cancel the $3.00 charge. If he won't, then take your business to Charles Schwab. Schwab won't charge you to reinvest those dividends and their commission costs are about 10 percent of what the big boys charge.

Another way to avoid the cost of a dividend reinvestment program is to request delivery of your NLY shares. When you receive the shares, ring or write NLY and ask for a DRP form; sign it, return it to NLY and except for a 44-cent stamp, the reinvestment won't cost you a pfennig or a penny.

Meanwhile, your broker is a bloody liar — the DRP plan is just a single one-time keystroke on a computer, an automated process like posting interest to your money market account. However, note that your purchase confirmation from that brokerage contains a $3.50 charge for postage. Would that broker tell you it costs $3.50 to mail a confirmation?

Now, when you place a good till cancel order, you are telling the broker when NLY stock trades at $15 or whatever price you specify that you want the stock to be sold.

So when NLY, which is now trading at $17.85, trades at $15, the stock is sold at the market price on the next trade. Your order will remain "open" until you cancel it or till it's executed.

I would also recommend that you add a DNR (do not reduce) to the order. In all cases when a stock pays a dividend, the GTC order price is reduced by the amount of the dividend unless noted otherwise by a DNR.

NLY and other mortgage REITS earn huge returns because they use leverage, lots of leverage. Here's how it works: Assume that Monster Mortgage has $1 million in cash and uses that money to purchase $1 million of mortgages with a 5 percent current return. That purchase will pay Monster $50,000 a year in interest. Next, Monster Mortgage will pledge that $1 million in mortgages as collateral with its bank and purchase $8 million of new mortgages yielding 5 percent. The short-term borrowing costs on the $8 million will be 3 percent so the $8 million new mortgage purchase nets Monster (5 percent less 3 percent) 2 percent. Monster earns $50,000 on the first million, then $160,000 on the $8 million purchase, which totals $210,000 on a $9 million investment or 23 percent. So after Monster Mortgage pays its officers, its office costs, mailing and other expenses, the remainder is paid to its shareholder.

Now, if short-term interest rates rise to 4 percent, so will Monster's cost of doing business. Monster won't earn $210,000; rather, it will earn ($210,000 less $80,000) $130,000 or 14 percent, which still ain't chopped liver but well down from 23 percent. So you can see how a rise in borrowing costs can significantly lower Monster's return. And when that happens, the value of Monster's stock will fall. This is why I recommended a GTC order (with a DNR) after you buy the stock. When the price falls, you limit your downside risk to nearly 3 points and you won't have to watch the stock every day.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.