Is Annaly Capital Stock a Viable Path to Long-Term Wealth? A Deep Dive into Total Return vs. Income Investing in Mortgage REITs

The debate between income-focused investing and total return strategies has long defined the landscape of real estate investment trusts (REITs), particularly mortgage REITs like Annaly Capital Management (NLY). With a forward dividend yield of 12.52% as of December 2025 and a history of volatile performance, Annaly presents a compelling case study for investors weighing high-yield opportunities against the risks of capital depreciation. This analysis evaluates whether NLY aligns with long-term wealth-building goals, emphasizing the interplay between dividend reinvestment, compounding, and the inherent volatility of mortgage REITs.

The Allure of High-Yield Dividends

Annaly's dividend yield has consistently outperformed broader market benchmarks, peaking at 17.49% in March 2023 amid a sharp decline in its stock price. This volatility underscores a critical reality: mortgage REITs often trade at significant discounts to book value, driven by interest rate sensitivity and balance sheet dynamics. While a 12.52% yield (as of December 2025) appears attractive, it is essential to contextualize this within the company's payout ratio of 117.72%-a metric indicating that dividends exceed earnings according to Koyfin data. For income-dependent investors, this raises sustainability concerns, as REITs with payout ratios above 100% are at heightened risk of cuts during periods of financial stress.

Total Return Performance: A Mixed Bag

Annaly's total return performance from 2020 to 2023 reveals a stark contrast between dividend-driven gains and capital losses. While reinvested dividends generated positive returns of +2.38% in 2020 and +4.94% in 2023, the -21.41% loss in 2022 highlights the risks of relying on a single asset class. This volatility is emblematic of mortgage REITs, which are heavily exposed to interest rate fluctuations and prepayment risks. For growth-focused investors, the key lies in leveraging dividend reinvestment to offset price declines, a strategy that requires patience and a long-term horizon.

The Power of Compounding and Diversification

The compounding effect of reinvested dividends is a cornerstone of long-term wealth creation. For example, an investor who reinvested Annaly's dividends from 2020 to 2023 would have seen their position grow despite the 2022 downturn. However, this strategy demands a diversified portfolio to mitigate the risks associated with NLY's high-yield profile. As Total Real Returns reports, "Mortgage REITs like Annaly are best suited for investors who can tolerate short-term volatility while prioritizing compounding over stable income." This aligns with the broader principle that total return-combining capital appreciation and dividends-is more critical for wealth accumulation than income alone.

Strategic Considerations for Long-Term Investors

For Annaly to serve as a "millionaire-making" vehicle, investors must adopt a disciplined approach. The recent 7.69% increase in quarterly dividends (from $0.65 to $0.70 per share in 2025) signals management's confidence in its capital-raising capabilities. However, the elevated payout ratio necessitates a cautious outlook. A diversified portfolio that includes NLY alongside lower-volatility assets can balance the risks of its high-yield strategy. Additionally, investors should prioritize tax-efficient accounts to maximize compounding, as REIT dividends are often taxed at ordinary income rates.

Conclusion

Annaly Capital Management's high-yield dividend and volatile performance make it a double-edged sword for long-term wealth creation. While its 12.52% yield offers significant compounding potential, the risks of capital depreciation and unsustainably high payout ratios render it unsuitable for income-dependent investors. For growth-focused portfolios, however, NLY can serve as a strategic component when paired with disciplined reinvestment and diversification. Ultimately, the viability of Annaly as a wealth-building tool hinges on an investor's ability to navigate its inherent volatility while prioritizing total return over short-term income.