The first screen that most dividend investors use is often based on dividend yield. The cutoff is normally on the low side, say 4%, so you limit your candidate list to high-yield stocks. However, after some point, higher yields don't necessarily indicate desirable opportunities. That's the case with Annaly Capital (NLY -0.65%) and its dividend yield of 12.8%. Sure, that's a huge yield, but you need to understand these three facts before you buy it.
1. Annaly Capital is not your typical REIT
Annaly Capital is a real estate investment trust (REIT), a corporate structure that is specifically designed to pass income on to investors via dividends. Most REITs own physical properties and lease those assets out just like you would if you owned a rental property. The big difference is that REITs generally own institutional level properties, like apartment buildings and warehouses. Mortgage REITs don't do that. Annaly owns a portfolio of bond-like securities that were created by pooling mortgages together. This is drastically different from a property-owning REIT.
For starters, mortgage bonds are traded all day long while properties tend to trade infrequently. That means that the value of mortgage bonds will react quickly to changes in the market, such as rising and falling interest rates, property market dynamics, and mortgage repayment trends. The value of Annaly Capital is basically the value of its mortgage bond portfolio, so good and bad news flows through to the stock price very quickly. If you are an income investor looking for an easy-to-understand, perhaps even boring, dividend stock, Annaly Capital is not going to be for you. You should really spend some time digging into the mortgage space to understand the niche before you step into it.
2. Annaly Capital has a terrible dividend track record
Just because something is complex doesn't inherently mean it is a bad choice. But there is something about Annaly Capital that will very quickly make it a bad choice for most dividend investors. As the chart below shows, the dividend has been highly volatile over time. And the volatility over the past decade has been to the downside.
NLY Dividend Per Share (Quarterly) data by YCharts
Most dividend-focused investors are looking to create a reliable stream of passive income. The goal is often to replace a paycheck in retirement. Buying a dividend that varies wildly over time, let alone one that has been heading lower for a decade, just isn't going to work for most dividend investors. Could the dynamics of the dividend change? Certainly. Are you willing to risk your retirement income betting that the trend changes? Probably not.
3. Annaly's stock price tends to follow the dividend
Now for another chart, this one overlaying Annaly's stock price on the dividend chart from above. Notice how the stock price tends to rise and fall along with the dividend. That's not shocking, since a rising dividend will probably be viewed as a positive development and a falling dividend is likely to be seen as a negative development.
However, the bigger story for dividend investors is that, over the past decade, Annaly Capital has been something of a double whammy. Not only have investors suffered through dividend cuts, leading to less passive income, but they have also experienced a loss of capital. That's a bad outcome. A very, very bad outcome.
There are better income options
If you were attracted to Annaly because of its huge yield, step back and strongly consider the history here. It is likely you will want to think about other income stocks with better track records. In the REIT space you might want to look at net lease giant Realty Income, casino mogul Vici Properties, or, if you don't mind a turnaround story, EPR Properties. All three have high yields and much better dividend growth prospects than Annaly Capital.
