Reuben Gregg Brewer, The Motley Fool

Sat, Jun 28, 2025, 1:35 AM6 min read

• Investors looking for yield might be tempted to buy Annaly Capital Management.

• Most investors will be better off with stocks like Bank of Nova Scotia and Realty Income.

• The difference is the reliability of the income streams each investment offers, which matters if your goal is to live off your dividends.

• 10 stocks we like better than Annaly Capital Management ›

Annaly Capital Management (NYSE: NLY) is offering a massive 14%-plus dividend yield today. And the dividend was just increased at the start of 2025, too. Sounds great, right? But, before you run out and buy the stock, you need to dig into the company's history just a little bit. You'll likely be better off with the lower yields on offer from Realty Income (NYSE: O) and Bank of Nova Scotia (NYSE: BNS).

Here's why Annaly could set income investors up for failure while Realty Income and Bank of Nova Scotia should leave you rolling in the dough.

Dividend investors come in all shapes and sizes, so there's no one right way to invest in dividend stocks. However, a common theme is that dividend investors are often trying to create an income stream that can support them in retirement. This is an important fact to consider as you invest your hard-earned savings, be it $100, $1,000, or $100,000. Far too often, investors chase yield without giving proper consideration to the risk of dividend cuts.

This is the big problem with Annaly Capital Management's huge dividend yield. The company is a mortgage real estate investment trust (mREIT). That means it buys mortgages that have been pooled into bond-like securities, not physical properties that it leases to tenants. Mortgage REITs are very similar to mutual funds, with the REITs earning the difference between their costs (which include interest expenses) and the interest they receive from the securities they buy.

There are a lot of moving parts, but the important outcome is that the dividends that mREITs pay have proven to be rather unreliable. As the chart below highlights, even though Annaly Capital just increased its dividend in 2025, that comes after a long string of cuts. And even before that string of cuts, the dividend was up and down.

Notice, however, that the share price has tended to trend along with the dividend. So that long downtrend in the dividend meant that income-focused investors would have been left with less income and less capital. That's a terrible outcome for anyone trying to live off their dividends.

Compare the ups and downs of Annaly Capital's dividend to the three decades worth of annual dividend increases on offer from the property-owning REIT Realty Income. Its 5.6% yield may be lower, but if you want to feel comfortable that you'll keep getting paid at the same or higher rate, Realty Income wins hands down. And the business model is much easier for investors to understand, given that Realty Income does the same thing you would do if you owned a rental property, only on a much larger scale.