Many investors prefer to invest in dividend paying stocks. If you’re one of them, real estate investment trusts (REITs) are a great way to do just that. This is because they are required by law to pay out at least 90% of their taxable income as dividends.
Most people think of REITs as investing in a variety of real estate properties, such as offices, retail space, apartment buildings, and data centers. However, REITs can also invest in mortgages. These are called mortgage REITs (mREITs).
Annaly Capital Management (NYSE: NLY ) is an mREIT. The stock offers an attractive dividend yield of 12.8%. While it deserves attention, should you buy the stock?
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Annaly Capital Management invests primarily in agency mortgage-backed securities (MBS). This usually makes up 80% of his portfolio range. It also owns non-agency mortgage servicing rights (it services a pool of residential mortgage loans in exchange for a share of interest payments).
These co-packaged mortgage loan funds have guarantees from agencies such as Fan Mae, Freddie Macand Ginnie Mae. This provides a high level of confidence that Annaly will not have a default that affects regular payments.
If that sounds like a low-risk investment strategy, Annaly tries to get a return through borrowing or leverage. September 30 its GAAP leverage was 7.1 times equity.
Annaly usually finances its purchases with short-term debt. While leverage can increase returns, higher leverage also increases a company’s risk. These include changing economic conditions and changing interest rates (ie, a narrowing of the difference between short-term and long-term yields).
Annaly Capital Management’s performance has been steadily improving. Its third-quarter earnings available for distribution (EAD) rose to $0.73 per share. This is 10.6% more than a year ago.
EAD is a key performance indicator (KPI) because it measures how much money a company has to pay out in dividends. It is calculated by adjusting certain items, such as non-recurring and non-cash expenses, to its GAAP net income.
Another KPI is EAD’s annual return on equity, which was 14.7%. A year ago it was about 13 percent.
Annaly Capital Management stock currently has a dividend yield of 7 November. is very high – 12.8%. In comparison, S&P 500 index yield 1.2%.
It currently pays a quarterly dividend of $0.70. Last quarter’s EAD covered the payout.
However, it’s important to note that Annaly’s performance fluctuates with interest rates. So dividend payments also fluctuate up and down. For example, in 2022 quarterly dividend was $0.88, and the following year it decreased to $0.65.
Annaly Capital Management shares are not suitable for those looking for guaranteed and constantly increasing dividends. Personally, I have too much risk in the company’s performance and dividends to invest.
In the end, while the Federal Reserve cutting interest rates could benefit Annaly, it also depends on how long-term yields change. And future interest rate cuts are not a sure thing. Even the Federal Reserve, which cut short-term interest rates at the previous meeting, indicated that a cut at the next meeting was not guaranteed. If the central bank is not sure what action it will take, how can investors know?
That’s a lot of uncertainty, and the economy faces heightened risks, including persistent inflation, increased layoffs and a prolonged government shutdown that has resulted in a lack of economic data.
So despite the high dividend yield, I’d pass on the stock.
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Lawrence Rothman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Should You Buy Annaly Capital Management Shares Now? originally published by The Motley Fool.
