Annaly Capital Management (NLY -1.39%) and W.P. Carey (WPC -1.37%) are both structured as real estate investment trusts (REITs). And yet, they are very different companies. If you are a dividend investor, knowing some key facts about these two REITs can help you decide not only which one is better for you but also why you should pay attention to more than just yield.
Both offer an above-average dividend yield
Dividend investors are generally drawn like moths to a flame to high yields. It's one of those emotionally driven decisions you need to understand (and prepare to counteract), or it will likely get the better of you. And when it comes to mortgage REIT Annaly Capital's 16% dividend yield, that flame is huge. By comparison, W.P. Carey's 5.4% yield seems almost tiny, even though it is well above the REIT average of 3.5%, using Vanguard Real Estate Index ETF as a proxy.
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If all you cared about was dividend yield, it's pretty clear that Annaly would be higher on your list than W.P. Carey or a broadly diversified REIT exchange-traded fund. But stopping here is a huge mistake.
One has a much more stable dividend history
If you're one of those wise investors who does look past dividend yield, a first stop is probably a company's dividend history. On this score, W.P. Carey and Annaly couldn't be more different. W.P. Carey has increased its dividend every single year since its initial public offering (IPO) in 1998. That's an impressive streak and shows a deep commitment to returning value to investors over time.
NLY Dividend Per Share (Quarterly) data by YCharts.
Annaly's dividend has varied dramatically since its 1997 IPO, moving up and down over time. That said, over the past decade, it has trended mostly lower. The interesting thing here is that Annaly typically has a tremendous yield, often above 10%. Yield and stock price move in opposite directions, meaning the REIT's stock price tends to fall when the dividend is cut. This keeps the yield high but means income investors not only suffer the pain of a dividend cut but also experience capital losses.
Simply put, if creating a reliable income stream is what you are looking to do, W.P. Carey is a far better option than Annaly.
These REITs have different business models
The big story here is that these two REITs do vastly different things. W.P. Carey uses the net lease model to buy physical properties. That means it mostly has a single tenant for each property, and that tenant is responsible for the majority of the property's operating expenses. Across a large enough portfolio, it's a pretty low-risk approach. W.P. Carey owns over 1,400 assets and is one of the largest REITs, by market cap, in the net lease sector.
Adding to its appeal, the company focuses on creating a diversified portfolio. For example, it owns properties across the industrial, warehouse, office, retail, and self-storage spaces. It also gets about a third of its rents from Europe. If it can't find good opportunities in one area, it can always shift its focus (by property type and geography) to someplace offering better choices. Based on its consistent dividend growth, W.P. Carey's model has proven safe and reliable over time.
Annaly is a mortgage REIT that generally buys mortgage securities pooled into a single asset, often called a collateralized mortgage obligation (CMO). They are kind of like bonds, where the payments come from the mortgage payments on the individual loans in the pool.
It's a fairly complex space, noting that these securities trade based on supply and demand. Interest rates and housing market dynamics can also impact these securities in material ways.
To make matters even more difficult for investors to wrap their heads around, mortgage REITs generally use leverage to enhance returns. Those loans often use the REIT's portfolio as collateral, further increasing risk, given that the portfolio's value can and does change over time (increasing the chance for margin calls, similar to what individual investors using margin might experience). Given all the moving parts, it is hardly surprising that Annaly's dividend has varied over time. In fact, it's really just a part of the business model.
Annaly's situation is not as bad as it seems
By this point, you might have decided that Annaly is a terrible company. Only that's not necessarily true: It's just not a great investment if you care about trying to live off your dividends. If you look at total return, which assumes that all dividends are reinvested, Annaly's performance since its IPO is actually slightly better than that of W.P. Carey.
NLY Total Return Level data by YCharts.
The key takeaway is that Annaly is intended for investors who aren't really interested in dividends. It's for investors wanting curated exposure to mortgage loans with a focus on capital appreciation over time. That's just not a group into which most individual dividend investors fall.
Which is the better buy? It depends
Investing isn't easy, and trying to simplify the process too much (like focusing on yield alone) can lead you astray. On the one hand, W.P. Carey is a much better option for dividend investors than Annaly, even though it has a materially smaller yield. The reason is that the REIT's business model is structured to support regular, growing dividend payments.
On the other hand, Annaly is a totally different animal, despite its massive yield. It's not a bad company, per se. It's just the type of investment that institutional investors might find more attractive than someone trying to create a reliable passive income stream to support their retirement years.
