Investors are often on the lookout for the next big win in the stock market. With its impressive 13.5% dividend yield, Annaly Capital (NLY -0.15%) may seem like a promising opportunity to build a seven-figure portfolio. However, history suggests that this investment may not live up to expectations.
This dividend record doesn't track
There's no denying that Annaly's dividend yield is attractive, especially when compared to the meager 1.4% of the S&P 500 Index and the average real estate investment trust (REIT) yield of nearly 4% using Vanguard Real Estate Index ETF (VNQ -0.28%) as a benchmark. But such a high yield often comes with a catch, and in Annaly's case, it's crucial to understand the dividend's backstory.
Annaly has a long history of cutting its dividend, and the stock price has followed suit. Over the past decade, both the dividend and the stock have steadily declined, resulting in an elevated yield that often exceeds 10%. However, this has translated into less dividend income and diminished capital, far from the ideal outcome for investors aiming to join the millionaire club.
To be fair, reinvesting the dividends over the past decade has had a significant positive impact on returns. While the stock itself has declined by roughly 50%, reinvesting the dividends would have resulted in a positive total return of 50%. This highlights the power of dividend reinvestment and compounding. However, when compared to the performance of the S&P 500 Index, which has gained 150% in stock value and achieved a 210% total return over the same period, Annaly falls short as a millionaire maker.
So what's the point of Annaly?
Annaly is a mortgage REIT that specializes in purchasing pooled mortgages, known as collateralized mortgage obligations (CMOs) or similar instruments. While this approach is unique within the REIT sector, it is not inherently problematic. However, it does require a thorough understanding of Annaly's business model before considering an investment.
The bigger picture revolves around Annaly's purpose. It is not designed for small investors seeking income from their portfolios due to its dividend volatility. Furthermore, the disparity between total return and stock price return is a significant factor. Annaly offers direct exposure to mortgage-backed securities, primarily targeting investors seeking this specific exposure. Unlike most property owning REITs, Annaly is not intended as an income-focused investment.
Traditionally, large institutional investors such as pension funds that prioritize asset allocation would be interested in owning shares of Annaly. For these investors, dividend income is not essential, and total return, assuming dividend reinvestment, takes precedence. However, if you are a small investor with a focus on dividends, Annaly may not align with your goals.
Don't get distracted by the big yield
The challenge for investors lies in the allure of Annaly's massive 13.5% dividend yield, which can trigger an emotional response. It creates the illusion of a potential shortcut to wealth, but Annaly's story is not that simple. (No story is THAT simple.) If your goal is to join the millionaire club, you are better off considering lower yielding stocks with more consistent dividend histories. Fortunately, the REIT sector offers plenty of such options to choose from.
Remember, building wealth through investing requires careful consideration, research, and a long-term approach. While Annaly may have its merits, it is not guaranteed to make you a millionaire. So, assess your investment goals, understand the risks, and make informed decisions that align with your financial aspirations.