There are few stocks in the market today that seem to be as attractive as Annaly Capital Management (NLY -0.32%). 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.
