Should Investors Worry About Annaly Capital's Dividend?
The past year has been terrible for the mortgage industry. Mortgage originators have seen volumes dwindle as rising rates have eliminated the incentive to refinance, and homebuyers have seen a significant decline in housing affordability. Mortgage real estate investment trusts (mREITs) have struggled as well, amid rising rates and concern as the Federal Reserve reduces it holdings of debt securities. This has caused mortgage-backed securities to underperform Treasuries. As a result, a lot of mREITs are trading with dividend yields in the midteens after their shares plunged. Annaly Capital (NYSE: NLY) is a leading mREIT, with a dividend yield of 16.1%. Why is it so high and can it last?
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Mortgage REITs are complicated stocks, and are a bit different from typical real estate investment trusts. Most REITs earn their returns by developing properties and then leasing them out. These properties could be shopping malls, office towers, or apartment buildings. Mortgage REITs don't buy real estate, however; they buy real estate debt. These companies will build a portfolio of mortgage-backed securities or whole loans and then use borrowed money (i.e., leverage) to turn a portfolio of mortgage-backed securities paying 4% into a dividend yield of 16%.
Source Fool.com
