Key Points
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.
How does Annaly Capital make money?
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.
The problem is in the timing. If rates rise, mREITs quickly face higher interest costs. But the securities they own have long maturities and don’t produce more income, so profits come under pressure. Worse, the securities mREITs own will likely also fall in value, so the yield they offer to a new buyer would be equivalent to the prevailing market yield. That’s a double hit for an mREIT: lower earnings and a drop in its net book value per share.
Annaly needs rates to hold steady
In the first quarter of 2026, Annaly generated $0.76 per share in earnings available for distribution. It paid out $0.70 per share in dividends during the quarter. That’s a 92% payout ratio, which is high but not unusual in the mREIT sector. But if rates rise, Annaly’s ability to pay its dividend could come under pressure quickly.
The problem is that oil prices are rising again as the conflict in the Middle East flares up. High oil prices have been stoking inflation, which is running hotter than the Federal Reserve would like. And that could force the Federal Reserve to increase interest rates, perhaps even at its next meeting.
The history is clear, Annaly’s dividend is highly variable
If you examine Annaly’s longer-term dividend history, you’ll find it is marked by volatility. You simply can’t buy this stock expecting the dividend to remain stable, which makes it a hard sell for investors trying to live off their dividends. And the company just increased its quarterly dividend to $0.75 per share, which could make dividend coverage even tighter based on the first quarter’s distributable earnings results. Dividend investors should tread with extreme caution here.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
