Is Annaly Capital Stock a Millionaire-Maker?

Investors should exercise caution when considering Annaly Capital (NYSE: NLY) and its huge 12.5% yield. This is because too much of a good thing can sometimes turn out to be a bad thing. Here's how Annaly Capital could help you build a million-dollar portfolio -- and why a huge dividend yield doesn't make this mortgage real estate investment trust (REIT) a reliable dividend stock.

What Annaly Capital is not

Annaly Capital raised its dividend at the start of 2025. There's a saying among dividend investors that the safest dividend is the one that has just been raised. That makes Annaly's shockingly large 12.5% dividend yield sound like a great opportunity for dividend lovers. Before you buy into this logic, however, it's important to understand just how large the dividend really is.

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The S&P 500 index (SNPINDEX: ^GSPC) currently yields around 1.1%. The average financial stock yields 1.3%. The average real estate investment trust has a yield of 3.9%. Annaly Capital's yield is more than three times larger than the yield of the average REIT, nearly 10 times larger than the average finance stock, and over 11 times the size of the yield offered by the market!

More conservative investors will likely believe that a yield that large has to come with some strings attached. It does. As the chart below highlights, Annaly Capital's dividend has been highly volatile over time. Furthermore, despite the recent increase, the dividend had been trending lower for years. Worse still, the stock price tends to follow the dividend up and down.

NLY data by YCharts.

The math behind dividend yield is simple, as it is just the annualized dividend divided by the share price. The dividend and price dynamics have resulted in the dividend yield being in double digits for most of the company's history. In other words, despite the volatile dividend, Annaly always appears on high-yield lists.

A better way to view Annaly Capital

If you're a traditional dividend investor, you're likely seeking a company that offers a sustainable, if not growing, dividend. The goal is likely to generate income that you can use to pay for living expenses, perhaps in retirement as a supplement to Social Security. Annaly Capital has not yet proven that it can provide the kind of reliability that most dividend lovers crave.

However, that does not mean it is a bad company. Nor does it mean it can't help the right investor become a millionaire. You just need to use Annaly the right way in your portfolio to achieve that end.

NLY Total Return Price data by YCharts.

As the chart above highlights, the REIT's total return since its inception is actually better than that of the S&P 500 index. Moreover, Annaly Capital's performance has been dramatically different than that of the broader index. This is a total return-oriented investment (which requires dividend reinvestment) that can offer valuable diversification benefits when used as a part of a larger portfolio. In that context, it could very easily help an investor build a seven-figure nest egg.

Make sure you understand what you are buying

Don't be swayed by Annaly Capital's high yield. Its history clearly shows that its dividend payout isn't fixed. You need to fully understand what you are buying, noting that the mortgage securities it purchases put it into a unique and complex niche within the broader REIT sector. You will need to do some extra legwork to understand the company's business.

However, if you are specifically looking for a reliable dividend stock, you'll likely be disappointed by Annaly, even though it has rewarded total return-focused investors quite well over time.

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.