Annaly Capital (NLY +0.83%) has performed fairly well over time on a total return basis. In fact, since its initial public offering, Annaly has outperformed the S&P 500 index (^GSPC +1.18%). A big reason for that outperformance is Annaly's massive 12.8% dividend yield. Before you buy the stock, thinking you've found an income machine, you need to know a few important details.
Annaly Capital isn't a traditional REIT
Annaly Capital is a mortgage real estate investment trust (REIT). It manages a portfolio of bond-like securities created by pooling mortgages. In some ways, it is more similar to a mutual fund than it is to a traditional property-owning REIT. This is an important difference because Annaly's goal isn't to produce a reliable, growing stream of dividends, as is the goal of many property REITs. Annaly is focused on producing a high total return, like a mutual fund.
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Total return requires investors to reinvest their dividends. If you are looking to use your dividends to pay for living expenses, like many dividend investors, 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 dividend has not been particularly reliable. It has both risen dramatically and fallen dramatically. The share price has followed the dividend, rising and falling over time. The dividend yield is exceptionally high most of the time, only because the stock falls when the dividend falls.
The data is very clear; this is not a reliable dividend stock. Annaly is simply not a good choice if you need the income your portfolio generates to pay for living expenses. That doesn't mean it is a bad company; it just means it isn't a reliable dividend stock. As noted, if you reinvest your dividends, you'll likely be highly pleased with your investment in Annaly. But investing for total return is different from investing for income.
Don't read into the dividend increase
It is possible to argue that the recent dividend increase marked the end of a long string of dividend cuts. The future for the dividend could even be improving. But the longer-term dividend story hasn't changed. Annaly produces an unreliable stream of income and is most appropriate for investors who focus on total returns rather than on generating a reliable, growing stream of dividends.
