Annaly or AGNC: Which 16%-Yielding Mortgage REIT Is the Better Buy?
Annaly and AGNC are getting hit by rising rates; is that an opportunity for investors or a valid recognition of risk?
In the world of mortgage real estate investment trusts (mREITs), Annaly Capital (NLY) and AGNC Investment (AGNC) are two prominent players. Both offer substantial dividend yields, with AGNC boasting a higher 17% yield compared to Annaly's 16.4%. However, before considering these stocks for an income-focused portfolio, investors must understand the complexities and risks involved.
While both companies have a strong track record, their dividends have been historically volatile, with significant declines in many periods. If seeking a dependable dividend for retirement income, neither Annaly nor AGNC appears to be a suitable choice. In fact, investing in the dividends would result in less income and capital due to the fluctuating stock prices.
Reinvesting dividends in both companies has yielded impressive long-term results, despite the current price decline. These investments essentially entail owning a portfolio of pooled mortgage securities, which generate income through the interest rate spread. However, the value of these securities is susceptible to interest rate fluctuations, causing the stocks to decline when rates rise.
AGNC Investment is solely focused on mortgage securities, resulting in a slightly higher yield due to the higher risk taken. Annaly Capital, on the other hand, differentiates itself by owning mortgage servicing rights, which generate a consistent income stream. While this diversification might make Annaly's stock more appealing in a rising-rate environment, it still does not mitigate the overall risks associated with owning mortgage-backed securities.
Ultimately, both Annaly Capital and AGNC Investment are intricate investments that warrant consideration from more active investors. While both offer exposure to the mortgage sector, Annaly's slightly more diversified business structure may give it an edge amid rising interest rates. However, income investors should proceed cautiously, as neither stock is likely to meet their income requirements. For a comprehensive investment strategy, consult The Motley Fool's premium services.
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