Income investors are always on the lookout for stocks that will produce high-yielding dividends, but many of these stocks do not perform well over the long term. Ironically, one of the most popular mortgage real estate investment trusts (mREITs) among income investors is a stock market laggard despite its reputation as a high-yielding income stock. Let’s take a closer look.
Annaly Capital Management Inc. NLY is an mREIT that invests in mortgage-backed securities (MBS) to loan money on residential properties backed by Fannie Mae, Freddie Mac or Ginnie Mae. It is one of the most well followed mREITs among investors today.
Annaly Capital Management has a long-standing reputation for being a volatile stock with a high beta of 1.35 (1.00 is on par with the general market) but has always paid income investors a large dividend that compensated for that volatility. And while Annaly Capital Management has a long history of paying double digit dividends, unfortunately it’s also cut that dividend several times over the past five years. The quarterly dividend that paid $1.20 in November 2017 is now only $0.88.
If you invested $10,000 in Annaly Capital Management five years ago, you would have received 222.41 shares at a split adjusted price of $44.96. Over the past five years you would have collected $20.00 in dividends, which is $4,448, a gain of 44.4%. Today, the $3.52 annual dividend yields 18.41%.
But the problem is Annaly Capital Management stock price has declined considerably over the past five years, and its most recent price was $19.12. Therefore, your total return over five years would be -12.99%, or -2.74% per year. Even with the dividends received you would only have $8,703 of your original $10,000 investment. So, the dividends paid only help if you are a pure income investor with no plans to ever sell the stock and intend to just collect dividends ad infinitum.
If you had reinvested your dividends instead of receiving the cash, you would have done even worse. Your original 222.42 shares would now have grown to 406.19 shares, but your total return would be -22.34%, or an average loss of 4.93% per year. Your 406.19 shares would now be worth $7,766. So, this is one stock where it may not pay to reinvest dividends.
On September 26, Annaly Capital Management initiated a 1-for-4 reverse stock split to boost its price, which had fallen below $6, but the price is still down about 5% since then. Investors are often wary of companies that initiate reverse stock splits.
Annaly recently reported its third quarter operating expenses. Non-GAAP earnings per share (EPS) of $1.06 beat the street estimates by $0.07. That was a positive and has since boosted the stock price by about 15%.
The annual funds from operations (FFO) of $4.19 still covers the $3.52 dividend, but the payout ratio is on the high side at 84%. There is not much margin of safety there.
The bottom line is that for pure income investors who care nothing about price swings, but just need high income, Annaly Capital Management could be a worthwhile investment at current levels. But for investors seeking capital appreciation along with dividends, Annaly Capital Management is probably not the ideal choice.
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