Annaly Capital Management (NYSE: NLY) has an ultra-high 14%-plus dividend yield. Toronto-Dominion Bank (NYSE: TD) has a yield of “just” 4.1%. In some ways, these two dividend stocks aren't even playing in the same league. Indeed, if dividend reliability and dividend growth are important to you then you'll definitely be better off with Toronto-Dominion Bank.
Here's what you need to know.
Annaly Capital is what is known as a mortgage-focused real estate investment trust (REIT). It buys mortgages that have been pooled together into bond-like securities. This is a unique niche of the overall REIT sector and Annaly Capital is more like a mutual fund than a landlord. The goal is to make the difference between the interest Annaly earns and its operating costs, which notably include the cost of debt.
Annaly is actually a perfectly fine mortgage REIT. And it has a massive dividend yield, as noted above. But don't let that yield distract you from one important fact. Annaly is a total return investment, which requires dividend reinvestment. If you spend your dividends here you will likely end up being very disappointed. That's because Annaly has a long history of cutting its dividend. And the share price tends to follow along with the dividend, going up and down along with the direction of dividend changes.
The graph below summarizes a lot of information. Notice that total return (the blue line) is pretty impressive. But the dividend (the orange line) and the stock price (the purple line) have been very volatile. Sure, the yield today is huge. But if you spend that dividend instead of reinvesting it, well, history suggests that your outcome here probably won't be very good.
Compare the volatility with Annaly to the stability offered by Toronto-Dominion Bank. During the Great Recession, when some of the largest U.S. banks were forced to cut their dividends, TD Bank, as it is more commonly known, held its dividend steady.
Even when TD Bank's U.S. arm was found to have laundered money and regulators hit the bank with a large fine and an asset cap, TD Bank increased its dividend despite the business setback. In fact, TD Bank has reliably paid a dividend since 1857.
