Prediction: 2 Stocks That Will Be Worth More Than Annaly Capital 5 Years From Now

Key Points

• Annaly Capital has a huge dividend yield of almost 15%.

• The mortgage REIT pays out so much in dividends that the value of its portfolio has trended lower over time.

• Investors looking for dividend stocks with growing businesses should stick with companies like Agree Realty and PepsiCo.

• 10 stocks we like better than Annaly Capital Management ›

Annaly Capital (NYSE: NLY) has a huge dividend yield that approaches 15%. And the mortgage real estate investment trust (REIT) just increased its dividend at the start of 2025. But don't get lured in by the yield if you are looking for a reliable dividend stock.

You will be better off with lower yields from growing businesses like Agree Realty (NYSE: ADC) and PepsiCo (NASDAQ: PEP). Here's why these two dividend payers are likely to be worth more than Annaly in five years.

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The big problem with Annaly Capital

Annaly Capital actually achieves what it sets out to do, so it isn't a bad mortgage REIT. The problem is the mortgage REIT model, which involves buying mortgages that have been pooled into bond-like securities. The goal is to pay out as high a dividend as possible, but the expectation is that those dividends will get reinvested. The end result is a strong total return.

NLY data by YCharts

If you don't reinvest those dividends, however, the outcome here will likely be far from desirable -- less capital and less income, which is about as bad as it gets for a dividend investor. Essentially, so much cash is going out the door as dividends that the value of the REIT's portfolio shrinks over time.

Yes, you'll get a huge yield in the near term. But investors are basically getting their principal returned to them in that fat dividend. With less money to put to work for investors, Annaly simply can't maintain the huge dividend over the long term. There will be ups and downs based on how mortgage bonds are performing over the short term, but the big-picture trend is the one that long-term investors need to watch.

Image source: Getty Images.

Growing businesses are better options

A better bet for most dividend investors will be finding lower-yielding stocks with growing businesses. For example, fellow REIT Agree Realty has a yield of 4.2%. It buys single-tenant net lease retail properties in the U.S., with tenants picking up most property operating costs. Roughly five years ago it owned about 1,200 properties. At the end of the first quarter of 2025 it owned more than 2,400 properties. Effectively, the size of the company's business doubled.

While the growth is actually fairly impressive, it isn't really shocking. The entire purpose of the REIT is to increase the size of its portfolio over time by buying additional properties. That allows it to pay an attractive dividend that also grows over time. During the past five years Agree's dividend has risen at about 5% a year, on an annualized basis. As the business and dividend grow over the long term, investors tend to reward companies like Agree with a higher stock price.

Another option is to buy a company like PepsiCo, which has seen its stock price tumble roughly 30% from the highs it reached in 2023. That drop has pushed the dividend yield up to a historically high 4.3% or so. Once again, however, the business backing the dividend is focused on growth.

For example, despite the relatively weak operating results PepsiCo is putting up today, it recently bought two smaller competitors. Poppi added probiotic beverages to the portfolio and Siete added Mexican American foods; both will help PepsiCo keep up with changing consumer tastes. And they will help the Dividend King continue to extend its impressive streak of annual dividend increases, which now stands at 53 years. The dividend has grown at a roughly 7% annualized pace during the past five years.

The problem isn't Annaly

As noted, Annaly isn't a bad company. It is just a very unique investment because of the nature of its business. Over time the value of the mortgage portfolio it owns, which is essentially the value of the company, is shrinking. That big yield isn't what it seems and isn't likely to be sustainable, and indeed it has been cut as the stock price declines. At least that's what history suggests here.

Most dividend investors will be better off buying lower, though still attractive, yields on offer from growing companies like Agree and PepsiCo.

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