Why I'll Never Own Annaly Capital Management REIT

Annaly Capital Management (NYSE: NLY) sports a huge 10% dividend yield at a time when the broader market is offering just 1.3% or so. That's not an anomaly -- this real estate investment trust's (REIT's) yield is normally in the double digits. But that's part of the problem, which takes a little explaining. Here's why I'll never own Annaly or any of the similarly run mortgage REITs.

The thing you need to understand about Annaly is that it owns pools of mortgages. That's very different from traditional REITs, which own physical properties that are rented out to tenants. There's inherent value in buildings, and they can be released and repurposed if there are any problems. In a worst-case scenario, they can be sold, with some idea of what the property is worth.

Essentially, a mortgage REIT is kind of like a mutual fund that owns a collection of paper assets. The value of the mortgages Annaly owns fluctuates, often quickly, based on supply and demand in the market. Interest rate levels play a key role in pricing as well, since they dictate the amount of interest that gets paid on mortgages. And, when times get tough on Wall Street, mortgage values can quite literally collapse.

Source Fool.com