Annaly Capital Management (NYSE: NLY) beckons with an alluring 14% dividend yield, a striking contrast to the S&P 500‘s 1.4% dividend yield. Nevertheless, income-focused investors are better off steering clear of the mortgage REIT and considering Realty Income (NYSE: O). While Realty Income offers a lower-yielding monthly dividend of 6%, it has exhibited consistent payout increases over the years, in stark contrast to Annaly’s repeated reductions. As Annaly’s payout remains at risk of another cut, investors hunting for a sustainable income stream and enhanced total return potential should direct their attention elsewhere.
A High-Risk, High-Yielding Payout
Annaly’s track record as a dependable dividend stock is marred by several payout cuts, including a substantial 26% reduction last year:
NLY Dividend data by YCharts
The REIT slashed its payment level, anticipating that rising interest rates would impact its earnings, a prognosis that materialized:
Data source: Annaly Capital. Chart by the author.
The company’s earnings available for distribution (EAD) almost plummeted to its reset dividend level by the third quarter. While its EAD showed improvement in the fourth quarter, even with reduced leverage, Annaly recently adjusted its return expectations due to market tightening. It may need to further revise its payout this year if market conditions continue to constrict.
A Magnificent Dividend Stock
In contrast to Annaly’s declining dividend, Realty Income has consistently increased its monthly payout, achieving this feat 123 times since its public market listing in 1994, including for the last 105 consecutive quarters. It has grown its dividend at a 4.3% compound annual rate since going public, marking a remarkable 240% increase:
Image source: Realty Income.
Realty Income’s resilient income stream is underpinned by its diversified portfolio of net lease properties, ensuring a robust rental income. With a low dividend payout ratio of 75% in the third quarter and a strong balance sheet, it possesses the flexibility to acquire additional properties that generate stable rental income. The recent acquisition of rival REIT, Spirit Realty, in a $9.3 billion deal, should bolster its adjusted funds from operations (FFO) by over 2.5% this year, progress toward its target range of growing adjusted FFO by 4% to 5% annually. Additionally, a recent purchase of a portfolio of retail properties in Europe from Decathlon further solidifies Realty Income’s expanding portfolio, serving to fuel the continued growth of its dividend.
The consistent growth of Realty Income’s dividend has propelled higher total returns compared to Annaly over the years. Since Annaly’s IPO in 1997, Realty Income has delivered an annualized total return of 11.9% versus 8.4% for the mortgage REIT. Consequently, Realty Income is poised to continue generating higher shareholder value at an elevated rate compared to Annaly, as the latter’s earnings and dividend prospects appear on a downward trajectory.
A More Enriching Dividend Stock
While Annaly’s current eye-popping dividend yield may catch the eye, its sustainability is in question. Consequently, income-focused investors should look beyond its high-yielding payout and consider investing in Realty Income instead. With a splendid history of dividend growth, Realty Income is positioned to provide higher total returns than the mortgage REIT.
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Matt DiLallo has positions in Annaly Capital Management and Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.
Views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.
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