Annaly Capital (Only +0.07%) Has performed quite well over time on a total return basis. In fact, since its initial public offering, Annaly has outperformed S&P 500 Index (^GSPC 0.11%). A big reason for that outperformance is Annaly’s hefty 12.8% dividend yield. Before you buy stocks thinking you’ve found an income machine, you need to know some important details.
Annaly Capital is not a traditional REIT
Annaly Capital is one mortgage real estate investment trust (REIT). It manages a portfolio of bond-like securities created by pooling mortgages. In some ways, it is more akin to a mutual fund than a traditional property-owning REIT. This is an important distinction because Annaly’s goal is not to produce a reliable, growing stream of dividends, as many property REITs aim to do. Annaly is focused on delivering high total returns like mutual funds.
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total return Investors need to reinvest their dividends. If you, like many dividend investors, want to use your dividends to pay for living expenses, you can’t reinvest them. This is why it is so important to examine Annaly Capital’s long-term dividend and stock price performance.
Annaly’s dividends are highly volatile, and that won’t change
As the chart below shows, Annaly’s dividends have not been particularly reliable. It has increased dramatically and also declined dramatically. Share prices tend to rise and fall over time after dividends. Most of the time the dividend yield is exceptionally high, simply because the stock falls when the dividend falls.
The data is very clear; This is not a reliable dividend stock. If you need the income generated from your portfolio to pay living expenses, Annaly is not a good choice. This doesn’t mean it’s a bad company; It just means it’s not a reliable dividend stock. As mentioned, if you reinvest your dividends, you will be extremely happy with your investment in Annaly. But investing for total returns is different from investing for income.
Ignore dividend growth
It’s possible to argue that the recent dividend increase marked the end of a long series of dividend cuts. The future of dividends may also be better. But the long-term dividend story hasn’t changed. Annaly generates an incredible stream of income and is best suited for investors who focus on total returns rather than generating a reliable, growing stream of dividends.