There are few stocks in the market today that seem to be as attractive as Annaly Capital Management (NYSE:NLY). However, there's much more to this stock than simply its 10.4% dividend yield.

In short, Annaly's best days are now in the rearview mirror and for the most part only challenges lay ahead. As a mortgage real estate investment trust, Annaly prospers when one or both of two conditions prevail. First, when the spread between short- and long-term interest rates expands. And second, when they do so in a declining interest rate environment.

This is why the financial crisis was a godsend for mortgage REITs. In response to the turmoil, the Federal Reserve dropped short-term rates to nearly zero. Meanwhile, although long-term rates followed suit, they took longer to decline and fell by a smaller margin.


The net result was that the spread between short- and long-term rates expanded, creating a particularly profitable scenario for mortgage REITs. Added to this, because interest rates decreased across the board, Annaly also got a boost to its book value, as MBS values and long-term rates are inversely correlated.

As Motley Fool contributor John Maxfield discusses in the video below, however, the current environment couldn't be further removed from this.

The better alternative to Annaly
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John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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