Annaly Capital stock: Should I buy, sell, or hold?
One type of investor might be attracted to Annaly Capital’s ultra-high returns, but this is probably not the person you thought.
You can’t say it enough: a high dividend yield doesn’t make a stock worth buying. Annaly Capital is a perfect example. It has a 13.2% dividend yield.
This real estate investment trust would not be the best choice for you if you are trying to live on the income generated by your portfolio. There’s a special type of investor that might be interested.
KEY DATA POINTS
Annaly is explained in a single chart
Dividend investors are drawn to high yields as moths to flames. You could end up with singed wings if you don’t spend the time to research what you are buying.
It’s because a high dividend yield can be a sign of Wall Street’s concern that the dividend is not sustainable. This is the story of Annaly, and a simple graph will explain everything.
On the chart above, the first line you should look at is the orange line. This shows the yield on dividends of Annaly over the last decade. It has always had a high dividend yield, typically over 10%. It’s sometimes well over 10%, as it is today.
Fair enough, Annaly is an REIT designed to provide income to investors. A high yield is not surprising. A yield of this magnitude, compared to the average REIT yield, which is only about 4% is out of place. This should make you wonder what is going on.
The purple and blue lines are there to help. The blue line represents the dividend which has been trending downwards. The stock price has followed the dividend down.
Dividend yield can be calculated by dividing annualized dividends by stock prices. If the dividend falls, the only way to maintain a high yield is to lower the price of the stock. This is exactly what happened.
Owning Annaly was a bad idea if you are a investor who wants to maximize your income portfolio to supplement Social Security during retirement. The result would have been less income and more capital losses. Annaly would seem to be a good investment for many investors, given its history.
A unique investment for a unique investor
Annaly isn’t for the average investor. This is a total return investment best suited for institutional investors who are focused on asset allocation.
Annaly is a mortgage REIT. This means that it owns mortgages which have been pooled together into securities similar to bonds. This is a great way to include mortgage exposure in a diversified portfolio. This story is more about the income than it is about the mortgage.
The chart below explains why. Over time, the stock price and dividend have declined together. This is bad news for those who use the income for their living expenses. If those dividends had been reinvested instead, then the return would have gone from around 50% down to around 50% up over the last decade.
Most dividend investors don’t look at this type of math, but insurance companies, pensions, and endowments do.
All depends on you
Some stories about investing are universal, while others are very personal. Most small investors who are interested in dividend investing will focus on companies that have a business model that supports a dividend growth.
Annaly’s shockingly high return is not something Annaly was designed to do. Most investors will likely pass up its stunningly high yield. Annaly may not be suitable for all investors, but it is appropriate for certain ones. There is a select group of investors who will benefit from the exposure to mortgages that Annaly provides.
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