The Downside of Annaly’s Dividend
Annaly has a long history of reducing its dividend payouts. Over the past decade, both the dividend and the stock price have steadily declined. As a result, the yield has remained elevated, often surpassing 10% throughout this period. Unfortunately for investors, this has translated to reduced dividend income and a decline in capital. Needless to say, this is not a winning formula for those seeking to join the millionaire club through dividends.
On the bright side, reinvesting the dividends over the past decade has had a notable positive impact on return. The accompanying chart illustrates that while the stock itself has declined by roughly 50% in the last 10 years, reinvesting the dividends would have resulted in a positive total return of 50%. This highlights the significant influence of dividend reinvestment and compounding. However, even with these gains, Annaly is still far from a millionaire-maker compared to the S&P 500 Index, which achieved a 150% stock-only gain and a 210% total return over the same period.
It’s important to understand that Annaly is a mortgage REIT that primarily invests in mortgage-backed securities, such as collateralized mortgage obligations (CMOs). This sets it apart from property-owning REITs that acquire physical assets for rental purposes. Annaly’s complex and unique approach provides investors with direct exposure to mortgage-backed securities, rather than positioning itself as an income-focused investment like traditional property-owning REITs.
Historically, large institutional investors, including pension funds, have sought such exposure for asset allocation purposes. In this strategy, dividend income is not intended for everyday expenses, making total return and dividend reinvestment the key focus. However, for most small dividend-focused investors, achieving asset allocation objectives is not their primary goal.
Beware the Tempting Dividend Yield
Investors mustn’t let Annaly’s impressive 13.5% dividend yield cloud their judgment. The allure of a “get rich quick” opportunity is often misleading, and Annaly’s story is far from simple. For those aiming to join the millionaire club through dividends, it is wiser to invest in lower-yielding stocks with consistent dividend histories rather than be swayed by a high yield that may not be sustainable.