Why Is Annaly Capital Management's Dividend So High?
The mortgage real estate investment trust (mREIT) Annaly Capital Management (NYSE: NLY) currently has an eye-popping annual dividend yield that tops 17%. While the high yield may attract a lot of investors looking to generate passive income, usually, the rule of thumb in dividend investing is to be wary of high yields. Let's take a look at why Annaly has such a high yield.
The first thing to understand about Annaly is that, as a REIT, the company qualifies for special tax advantages. But to get those, Annaly must pay out at least 90% of its annual taxable income in dividends. This is why most REITs are known for having above-average dividend yields, although definitely not 17%.
MREITs, however, are different from REITs in that instead of investing in actual real estate, they invest in real estate bonds. Annaly largely invests in mortgage-backed securities (MBS) guaranteed by the government or agency MBS. While these bonds do not face a lot of credit risk, they do face interest rate risk. Bond values and yields have an inverse relationship, so as yields, rise bond values fall (and vice versa). As the Federal Reserve raised rates aggressively and mortgage rates soared, Annaly started to rack up unrealized losses, especially in its agency MBS portfolio.
Source Fool.com
