Better Dividend Stock: W.P. Carey vs. Annaly Capital Management

Dividend investors often focus first on dividend yield, which makes some logical sense. However there's a risk in over-focusing on yield. A great case in point is the comparison of Annaly Capital Management (NYSE: NLY) and W.P. Carey (NYSE: WPC). Annaly has a dramatically higher yield at around 14%, but most investors will likely be better off with W.P. Carey's 5.6% yield. Here's what you need to know when choosing between these two high-yield real estate investment trusts (REITs).

What does Annaly Capital Management do?

Annaly Capital Management is a mortgage REIT. It buys mortgages that have been pooled together into bond-like securities. Mortgage REITs are a highly specialized niche of the broader REIT sector, where most companies buy physical properties. The bond-like securities that Annaly buys trade all day long and their value is impacted by things like interest rates, housing market conditions, and mortgage repayment trends. It is a pretty complex business that is difficult for shareholders to track.

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Adding to the uncertainty here is the often liberal use of leverage, usually with the mortgage securities portfolio used as collateral. When the value of mortgage securities is changing quickly, leverage can quickly increase the pain. That said, most of the time leverage helps to increase the interest income Annaly and its peers generate. That's the core goal, with the company earning the difference between its costs (including operating expenses and interest expenses) and the interest it earns on the mortgage securities it owns.

There's nothing wrong with Annaly's business model, per se. The problem is that the 14% dividend yield isn't something you can actually count on if you are trying to live off of the dividends your portfolio generates. Take a look at the graph below. The total return line (blue) is impressive, but the dividend and stock price (the orange and purple lines, respectively) have both fallen over time. If you spent the dividends instead of reinvesting them, you would have been left with less capital and less income. That's not likely to be what most dividend investors are looking for.

NLY data by YCharts

That said, Annaly just increased its dividend at the start of 2025. That's great news and it is entirely possible that it is the start of an upward trend. But the big issue is reliability, with the mREIT's volatile dividend history clearly indicating that investors have to go in expecting the dividend to be variable over time.

Why W.P. Carey's 5.6% dividend yield is better

This brings the story to W.P. Carey, which cut its dividend in late 2023. But that cut came after 24 consecutive annual dividend increases. And W.P. Carey started increasing the dividend again the quarter following the dividend cut. It has increased the dividend every quarter since, which is the same quarterly increase cadence that existed before the cut. The question is, why did that cut happen?

With Annaly the dividend cuts are simply a part of the mREIT business model. With W.P. Carey the cut came because management decided to exit the office sector, a property type that was facing material hardship. The reduction was really a reset, with the net lease REIT simply getting back to normal, albeit with a slightly smaller portfolio, right after the cut. The truth is that the office exit and dividend reset probably made W.P. Carey a more attractive business to own for long-term investors.

The 5.6% yield is lower than the yield you'd collect from Annaly. But W.P. Carey's more traditional REIT business model is actually built to grow the dividend over time. That's highlighted by the pre-cut dividend track record, but also the basic nature of the portfolio. W.P. Carey owns physical properties that generate rental income. And most of the time it grows the portfolio via new acquisitions. Divestitures play a role, too, but the office exit was unusual in its scale. So the general goal is to grow the business and provide investors with a growing income stream.

High yields are good, but business models are just as important

At the end of the day Annaly Capital is a total return investment, which basically requires dividend reinvestment. There's nothing wrong with that, but it isn't the way most dividend investors think about investing. If you are looking to live off of your dividend income, despite its dividend cut in 2023, W.P. Carey is likely to be a much better option for your portfolio.

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Reuben Gregg Brewer has positions in W.P. Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.