If you invested $10,000 in Annaly Capital Management 5 years ago, here’s how much you’d earn in dividends today

Income investors are always looking for stocks that will pay high-yield dividends, but many of these stocks don’t perform well over the long term. Ironically, one of the most popular mortgage real estate investment trusts (mREITs) among income investors has lagged the stock market despite its reputation as a high-yielding income stock. Let’s take a closer look at that.

Annaly Capital Management Inc. (NYSE: NLY) is an mREIT that invests in mortgage-backed securities (MBS) to lend money for homes backed by Fannie Mae, Freddie Mac or Ginnie Mae. It is one of the most followed mREITs among investors today.

Annaly Capital Management has long had a reputation for being a volatile stock with a high beta of 1.35 (1.00 is comparable to the general market), but has always paid income investors a large dividend that offset that volatility. And while Annaly Capital Management has a long history of paying double-digit dividends, it has sadly cut that dividend several times over the past five years as well. The quarterly dividend that paid $1.20 in November 2017 is now just $0.88.

If you invested $10,000 in Annaly Capital Management five years ago, you would have received 222.41 shares at an adjusted price of $44.96. Over the past five years, you would have received $20.00 in dividends, which is $4,448, a gain of 44.4%. Today, the $3.52 annual dividend yields 18.41%.

But the problem is that Annaly Capital Management’s share price has fallen significantly over the past five years, and the most recent price was $19.12. Therefore, your total return over five years would be -12.99%, or -2.74% per annum. Even with the dividends received, you would only have $8,703 of your original $10,000 investment. So the dividends paid only help if you are a pure income investor with no plans to ever sell the stock and plan to collect unlimited dividends.

If you had reinvested your dividends instead of receiving the money, you would have done even worse. Your original 222.42 shares would now have grown to 406.19 shares, but your total return would be -22.34%, or an average loss of 4.93% per year. Your 406.19 shares would now be worth $7,766. So this is a stock where it may not pay to reinvest dividends.

On Sept. 26, Annaly Capital Management initiated a 1-for-4 reverse stock split to raise the price, which had dropped below $6, but the price has continued to drop about 5% since then. Investors are often wary of companies that initiate reverse stock splits.

Annaly recently reported her third quarter operating expenses. Non-GAAP earnings per share (EPS) of $1.06 beat street estimates by $0.07. That was positive and has since increased the share price by about 15%.

The $4.19 annual Funds from Operations (FFO) still covers the $3.52 dividend, but the payout ratio is on the high side at 84%. There’s not much margin of safety there.

The bottom line is that for pure income investors who don’t care about price fluctuations, but just need a high income, Annaly Capital Management can be a worthwhile investment at current levels. But for investors looking for capital growth in addition to dividends, Annaly Capital Management is probably not the ideal choice.

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