Real estate investment trust (REIT) Annaly Capital Management (NLY 1.02%) is offering investors a massive 13% dividend yield today. Before you start getting excited, there are a few important caveats to know about this investment. The two biggest are that dividends are really important and that you really can't rely on those dividends. Here's some graphs to help explain.
What you'd have now
If you had purchased $1,000 worth of mortgage REIT Annaly stock at the start of 2023, roughly half way through the year your investment would be worth $985. That's not terrible, per se, but the same amount in the average REIT, using Vanguard Real Estate Index ETF (VNQ 0.05%) as a proxy, would be worth roughly $1,000. So Annaly was a laggard.
However, if you add dividends into the mix, which is called total return, by assuming dividend reinvestment, Annaly starts to look a lot better. That $1k investment would be worth around $1,020 compared to roughly $1,030 for the average REIT, also assuming dividend reinvestment. Annaly's huge 13% yield does add value compared to the much smaller 4.3% yield offered by Vanguard Real Estate Index ETF.
Year-to-date 2023 is a pretty short time period, though. There's more of interest here than just the high yield and stock price decline. The dividend was cut 26% in March. That has been a common theme for Annaly over the past decade.
Long-term trends
Stock price and yield move in opposite directions. But Annaly's yield has generally stuck around the same range over the past 10 years, roughly around 10% or a bit higher, even though the dividend has headed steadily lower over the decade. The only way that happens is if the stock price declines along with the dividend, which is exactly what has taken place.
That's a terrible outcome for dividend investors that are hoping to live off of the passive income they create from their portfolios. Not only has the dividend stream declined over time, but there has been a capital loss as well. And yet investors that want to have exposure to mortgage debt might still find the REIT of interest. It just needs to be looked at as a portfolio of mortgage loans and not as a property-owning landlord.
As the chart above shows, a $1,000 investment in Annaly a decade ago would only be worth around $380 today. But if you reinvested the dividends (which is total return), your investment would be worth about $1,230. Indeed, the big yield clearly has material value here, but only if you want exposure to a portfolio of mortgage loans. As the chart below highlights, investors would have fared dramatically better with an investment in a REIT index ETF.
Which is why Annaly is something of an acquired taste. Most dividend investors will not find it an attractive choice. But a select few, assuming they want to invest in mortgage debt, might be OK with the results here within a broadly diversified portfolio. In general, the list of people interested in Annaly will probably skew toward institutional investors and those with a heavy focus on asset allocation.
A strange investment
When all is said and done, Annaly is not your typical REIT. While generating dividend income is a key focus, the mortgage debt that makes up its portfolio creates a unique investment situation. Most investors will probably want to pass on the high yield since the dividend hasn't proven sustainable over time.
