Is Annaly Capital's 16% Dividend Worth the Risk?
Annaly Capital Management (NYSE: NLY) is one of the highest-paying dividend stocks, with a yield of more than 16%. The double-digit dividend yield of this mortgage real estate investment trust (mREIT) may be attractive in today's high inflation bear market, but is its dividend worth the risk? Let's find out.
Annaly Capital primarily invests in agency mortgage-backed securities (MBSs) that are guaranteed by the federal government. Additionally, it invests in a small but growing number of non-agency-backed securities (non-QM), like jumbo loans or real estate loans on rental properties. And it earns income from mortgage servicing, which is the processing and management of mortgage accounts in return for fees. As of the third quarter of 2022, the company held roughly $86.2 billion in assets in its portfolio.
Mortgage REITs rely heavily on short-term debt to fund their long-maturity assets. At the start of 2022, the federal funds rate, which sets the cost for short-term borrowing, was at 0.25% -- making Annaly's cost of capital extremely cheap. So far this year, the Federal Reserve has raised the fed funds rate six times, which has seriously hurt Annaly's earnings. Rising interest rates negatively impact a mortgage REIT's profitability because it narrows the margins on its spread between the interest its earns from its loans and its cost of borrowing.
Source Fool.com
