There’s a large mortgage investment company with more than 25 years in the business called Annaly Capital Management, whose dividend yield is 17%. That’s nearly twice as high as the average return for the stock market. It’s more than four times what retirement planners say you can safely spend from a portfolio. It’s a jackpot with a ticker symbol—if only the yield could be trusted.
Annaly, which declined to comment for this article, is a real estate investment trust, or REIT, with similarities to the equity REITs that buy physical property and collect rents—and some key differences. Both types of REITs must pay the bulk of their income as dividends to minimize corporate taxes. Mortgage REITs typically lend money to developers, both commercial and residential, or buy mortgage securities, including ones that are backed by government agencies.
So what’s to like? UBS argued back on Sep. 18 that the damage was already done. Rising rates, combined with the Federal Reserve selling off mortgage securities, had pummeled the book values of securities portfolios. Lending spreads for mortgage-backed securities were surprisingly healthy—around 1.6 percentage points, versus a long-term average of closer to a point.