Reuben Gregg Brewer, The Motley Fool
5 min read
In This Article:
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You can get ultra-high yields from stocks like mREIT Annaly Capital Management.
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Annaly's 14% dividend yield should raise alarms for long-term investors.
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A better choice will likely be this property-owning REIT's 6.2% yield.
High yields sometimes come with high risks. That's an important issue to keep in mind when you use dividend yield as a screening tool, as do most dividend-focused investors.
Right now, looking for yield alone might draw you to Annaly Capital Management (NYSE: NLY) and its massive 14%-plus dividend yield. But you'll probably be better off if you temper your income expectations and buy this 6.2%-yielding real estate investment trust (REIT) as it works its way back from a temporary business setback. Here's what you need to know.
Annaly Capital is a mortgage REIT (mREIT). This is a fairly complex niche in the broader REIT sector, where most companies own and rent out physical properties.
Mortgage REITs like Annaly own portfolios of bond-like securities. These securities are created by pooling together mortgages. It would be very hard for an investor to track an mREIT, noting that interest rates, housing market dynamics, and even mortgage repayment trends impact the value of the securities Annaly owns.
But the really telling piece of the story here is shown in the graph. Notice the volatility in the orange line, which is the quarterly dividend. That volatility is basically mimicked by the purple line, which is the stock price.
Most dividend investors are looking for a reliable dividend that is hopefully growing over time. That's just not available here, and it is part and parcel to the mortgage REIT business model. To Annaly Capital's credit, the dividend was just increased, but that doesn't change the fundamental volatility of the mREIT business model.
EPR Properties (NYSE: EPR) cut its dividend during the coronavirus pandemic at the turn of the decade. That was a bad outcome for income investors, but there was a very good reason for the dividend cut.
EPR Properties owns experiential properties that are meant to bring people together in large groups, from amusement parks to movie theaters. During the COVID pandemic, people were asked to socially distance, and nonessential businesses were shut down. EPR Properties cut the dividend to ensure it had enough liquidity to survive the health scare, while also acting to support its tenants through the difficult period.
