The 12.7% Dividend Trap: Why This Mortgage REIT Isn't Your Income Solution

The Siren Song of Sky-High Yields

Annaly Capital Management (NYSE: NLY) sits at the top of many dividend hunter’s watchlists. With a dividend yield hitting 12.7%, it dwarfs the S&P 500’s meager 1.2% and makes the typical REIT’s 3.9% average look pedestrian by comparison. But here’s the thing—that juicy number isn’t an invitation to park your retirement funds. It’s a warning sign wrapped in attractive packaging.

What You’re Actually Buying

This is where most investors stumble. When you think “REIT,” you probably imagine apartment buildings, shopping centers, or warehouses generating steady rent. Annaly isn’t that. It’s a mortgage REIT—a creature entirely different from the property-owning kind.

Instead of owning bricks and mortar, Annaly buys bundled mortgage securities. Think of it like mutual funds that primarily invest in mortgage bonds rather than individual stocks. The company uses leverage aggressively (borrowing heavily against these securities) to amplify returns. This strategy works brilliantly in the right conditions, but it’s decidedly riskier than traditional REITs.

Like mutual funds, Annaly tracks tangible net book value per share quarterly—essentially its own version of net asset value. But the business model centers on total return, not dividend payments alone. That’s the crucial distinction dividend investors miss.

The Real Problem: Your Income Keeps Shrinking

Charts tell the story Annaly’s marketing team would rather keep quiet. Over the past decade, the dividend per share has taken a beating. Yes, a recent hike made headlines, but it barely compensates for years of cuts. Meanwhile, share prices have been on a roller coaster, mostly trending downward.

This creates a brutal math problem for income-focused investors: If you lived off Annaly’s dividends, you’d have received less income each year while watching your principal erode. By contrast, someone reinvesting dividends and focusing on total return would have done notably better—potentially outpacing the S&P 500 over longer periods.

Two Paths, Two Outcomes

Path 1: You spend the dividends. Result? Shrinking income and shrinking capital. Not ideal for anyone depending on portfolio income.

Path 2: You reinvest dividends and periodically sell shares. Result? Better total returns, but you’re actively depleting your investment and have to time those sales carefully. It’s a more complex game.

Who Should Actually Own This

Annaly makes sense for sophisticated investors chasing total return and willing to weather volatility. For those seeking diversification beyond traditional stock-bond portfolios, it could have a role—as a smaller position, not a core holding.

For most dividend investors? Look elsewhere. Find companies with actual dividend growth histories—ideally Dividend Kings with 50+ consecutive years of increases. You’ll accept lower yields, but you’ll sleep better knowing your income isn’t on a downward spiral.

The Bottom Line

That 12.7% yield is seductive precisely because it shouldn’t be trusted. Annaly Capital Management is a quality company executing its strategy well—but its strategy and yours (if you’re seeking reliable income) are fundamentally misaligned. The difference between yield and actual income you can depend on is everything.