Annaly Capital's Dividend Yields 13%. Here's What Has to Hold for the Payout to Last.
Annaly Capital covered its dividend in the first quarter, but a rate hike could complicate the dividend math.
Overview
Annaly Capital (NYSE: NLY) is a mortgage real estate investment trust (REIT). This is a unique niche of the broader REIT sector that is a bit more complex to understand. That said, mREITs often have very large yields, luring in dividend investors that may not understand the risks they are taking on. Annaly Capital's 13% yield has a very real near-term headwind. Here's what you need to know.
A property owning REIT buys a building and leases it to tenants, generating rental income. Mortgage REITs like Annaly Capital buy mortgages that have been pooled into bond-like securities, generating interest income. In both cases, leverage is employed to enhance returns, with profits driven by the difference between operating costs (including interest expenses) and income. However, property REITs generally finance their operations with mortgages or bond issuance. Both generally have rates that don't change with interest rates. Mortgage REITs, on the other hand, tend to make use of short-term loans with rates that adjust quickly.
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Originally published at www.fool.com.