For investors seeking dividend income, the allure of Annaly Capital Management's (NYSE: NLY) whopping 14.2% dividend yield might seem enticing at first glance. However, a closer examination reveals that opting for UDR's (NYSE: UDR) more modest 4.6% yield could be a wiser choice. Here's what you need to consider before potentially adding a serial dividend cutter to your portfolio and overlooking a historically high yield from a reliable dividend grower.
Annaly: A Tale of Dividend Cuts A glance at the dividend history chart unveils a stark contrast between Annaly Capital and UDR. While UDR's dividend has demonstrated a slow and steady upward trajectory over the past decade, Annaly's dividend has been subjected to multiple cuts.
For investors reliant on their portfolio's income generation, enduring repeated dividend reductions can be counterproductive. A high initial yield fails to compensate for diminishing income streams, and notably, Annaly's stock price has mirrored the downward trajectory of its dividend, resulting in capital losses for investors.
To be fair, Annaly isn't inherently flawed as a real estate investment trust (REIT). It caters primarily to large institutional investors, such as pension funds, whose focus on total return and asset allocation differs significantly from the objectives of most individual dividend investors. Moreover, as a mortgage REIT, Annaly operates in a highly complex niche within the broader REIT sector, dealing with bond-like investments comprising mortgage portfolios impacted by interest rate fluctuations and housing market dynamics.
Given its intricate operational dynamics and unreliable dividend history, Annaly may not be well-suited for conservative income investors seeking stability and predictability in their investment choices.
UDR: Stability Amidst Boredom In stark contrast to Annaly's complexity, UDR offers investors a rather mundane yet appealing proposition. Specializing in apartment buildings, UDR provides a fundamental human necessity—shelter. Its portfolio is meticulously crafted to ensure diversification across different markets and apartment qualities, mitigating the risk of any single segment disproportionately influencing performance.
What truly sets UDR apart from Annaly is its consistent dividend growth over the past 15 years. Although a dividend cut occurred during the Great Recession, it was part of a strategic shift away from lower-quality properties towards more desirable assets with greater long-term growth potential. This strategic pivot has borne fruit, with UDR steadily increasing its dividend ever since.
Despite facing challenges such as rising interest rates and heightened apartment construction activity, UDR's dividend remains robust, supported by an adjusted funds from operations (FFO) payout ratio of approximately 75% in 2023. The stock's recent price decline has elevated its dividend yield to near 10-year highs, presenting a compelling opportunity for income-oriented investors seeking a reliable income stream.
In conclusion, while Annaly may boast a tantalizingly high dividend yield, the associated risks outweigh the potential rewards for most dividend investors. Conversely, UDR's track record of dividend growth and stability, coupled with its historically high yield, presents a more appealing option for long-term-focused income investors seeking dependable returns from a well-managed REIT.