A Still-Safe 18% Dividend In “Virtual Banks”

Exactly one year ago in DailyWealth, I told you about “the greatest moment in American finance.” My headline was “You Should Take Advantage of This No-Risk Trade Right Now.”

If you took my advice and bought shares of “virtual bank” Annaly (NLY), you’re up 42% today… And we’re only halfway through the trade.

A year ago, I told you we had the opportunity for 85% capital gains, PLUS 39% in dividends - for a total return of more than 120% in two years.

While I told DailyWealth readers about Annaly, I told my paid subscribers in True Wealth my favorite way to play it… through shares of another virtual bank: Hatteras Financial (HTS), which has done even better.

The “virtual bank” business is incredibly simple… They borrow money at a low interest rate and invest it at a higher interest rate in an ironclad safe, government-guaranteed investment. They earn the difference - the “spread.” As I told you last year, when these guys are in their sweet spot, they make a fortune.

Right now, they’re in their sweet spot. And there’s still plenty more in profits ahead. But the share prices have fallen lately.

I’m not worried. The trade is still on track. Look, Hatteras should pay $5 in dividends in 2010. With its stock price around $27.50, Hatteras’ dividend yield is about 18%. Let me be clear…

That’s an 18% dividend, with your money invested in government-guaranteed investments.

Hatteras is now trading for a reasonable price again, at only 1.09 times book value, as opposed to its recent peak around 1.4 times book value.

In short, I’m not worried about Hatteras or Annaly. They’re both great income vehicles… They capture the spread between what they earn in interest and their interest cost. That spread is currently around 3% - that’s huge.

And the Federal Reserve can’t raise rates until at least next summer (2010). So Hatteras and Annaly will be able to borrow money cheaply for at least another six months.

My plan with virtual banks is to sell well before it appears the Fed will raise rates. So for 18% dividends… plus even bigger potential capital gains… own Hatteras or Annaly now. Plan on selling once they rise above a price-to-book value of 1.4 (for a capital gain of 30% or more from current levels, PLUS dividends). Or sell sometime in the first quarter of 2010, well before the Fed considers raising rates.

This should be easy money… If you bought a year ago, when I told you about Annaly in DailyWealth, you’ll end up with more than 100% in capital gains and dividends. Even if you didn’t buy then, you’ve got a great chance now: a safe total return (capital gains plus dividends) approaching 40% in less than six months.

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