Annaly Capital Management (NLY +0.39%) is a popular stock. That's mainly due to the real estate investment trust's (REIT) big-time dividend yield. At over 12%, it's 10 times higher than the S&P 500's dividend yield (1.2%).
I used to own Annaly stock. However, I sold my investment in the mortgage REIT due to its falling dividend and stock price. I've replaced it with Main Street Capital (MAIN 0.26%), a financial stock that does a better job of growing its dividend and shareholder value. Here's why I think the business development company (BDC) is a better buy today.
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Annaly's issues
I initially bought shares of Annaly to collect its lucrative dividend. However, the REIT cut its dividend several times over the years. Annaly faced several headwinds, including the impact of changes in interest rates on its mortgage portfolio. Falling rates led borrowers to refinance their higher-rate mortgages, forcing Annaly to reinvest the proceeds from these paid-off investments into lower-yielding mortgages. Meanwhile, higher rates increased its borrowing costs.
As a result, Annaly's share price has fallen (down more than 40% over the past decade). That was due to its declining earnings and decision to routinely issue new shares to grow its mortgage portfolio. However, instead of growing shareholder value, these stock sales eroded it.
NYSE: NLY
Key Data Points
Annaly's high-yielding dividend has helped offset some of the deterioration in its share price. However, its total return of around 100% over the past decade (7.3% annualized) has lagged the market and other income-focused investments.
A better income investment
While Main Street Capital doesn't invest in mortgage debt like Annaly, it primarily invests in debt. It provides capital (debt and equity) to small private companies. The company's debt investments generate interest income while the equity investments often deliver dividends and capital appreciation.
NYSE: MAIN
Key Data Points
Main Street Capital's income streams support its dividend payment. The BDC pays a monthly dividend set at a sustainable level. Unlike Annaly, Main Street has never cut its monthly dividend. Instead, it has raised its payment by 136% since its 2007 IPO. Additionally, Main Street Capital periodically pays supplemental quarterly dividends. While those supplemental payments can fluctuate, the BDC has paid the same level for the past several years. These two dividend streams yield 7.2% at the company's current share price.
In addition, Main Street Capital's equity investments have helped increase the value of its shares. Its net asset value per share has risen 155% since its IPO. As a result, the company's stock price has risen (up nearly 115% over the past 10 years). Add in the dividend income, and Main Street Capital's total return is almost 360% (16.5% annualized) over the past decade.
An unstoppable value creator
While Annaly Capital offers a high-yielding dividend, it has had to cut its dividend several times over the years. As a result, its share price has fallen, impacting its total return.
That's why I've moved on from Annaly and have been buying Main Street Capital instead. It pays a steadily growing monthly dividend, supplemented by quarterly payments. On top of that, the company's equity investments have steadily increased the net asset value of its shares, boosting its total return, which has significantly outpaced Annaly's. This differentiated strategy makes it a better buy for unstoppable income and growth potential.
