1 Ultra High Yielding Dividend Stock That Could Double Your Money By 2026

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Looking for a relatively reliable way to grow your portfolio? Buying stocks that pay regular dividends and reinvesting those dividends is a proven method that has proven itself over time.

Of course, the time it takes to realize huge returns decreases when your stocks pay higher dividend yields. Annaly Capital Management (NLY -2.00%) offers such a high return right now that reinvesting the installments it offers each quarter could double your initial investment in four short years.

Why ultra-high efficiency?

Annaly Capital Management is offering a tantalizing 20.1% yield right now because the stock is hammered. In a nutshell, the market is worried about the Federal Reserve’s efforts to reduce inflation by raising interest rates and the effect this is having on Annalys’ rate-sensitive business.

Annaly Capital Management is a real estate investment trust (REIT) that buys mortgage-backed securities (MBS) and not physical assets. Instead of collecting rent, mortgage REITs make a profit on the difference between the interest income that their long-term MBS portfolios provide and their shorter-term funding costs. The market fears that Annaly’s borrowing expenses could exceed interest income before the company has a chance to update its MBS portfolio.

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Income investors generally feel comfortable with Annaly stocks in their portfolio, as the company focuses on agency-backed securities whose cash flows are guaranteed by the US government. While Annaly’s cash inflows are predictable, its funding costs have risen sharply this year. The top of the Fed’s target rate range exploded from 0.5% in March to 3.25% following the last meeting in September.

The Federal Reserve has a mandate to keep raising rates until it gets inflation under control, and no one knows when it will be able to stop. This means that the payments you receive from Annaly may not be as reliable as you would like.

The first domino to fall?

On September 29, 2022, shares of Annaly Capital Management fell approximately 10% overnight in response to an announcement by Invesco Mortgage Capital (IVR 0.91%), one of Annaly’s industry peers. Invesco Mortgage cut its quarterly dividend from $0.90 per share to $0.65 per share.

Invesco Mortgage Capital said earnings were still strong, but the company wanted to improve its capital structure. Mortgage REIT had a leverage ratio of 4.7 as of August 31, 2022. At a glance, this ratio looks significantly better than that of Annaly Capital Management, which reported a leverage ratio of 5.4. at the end of June.

Reason to buy

Annaly Capital Management and Invesco Mortgage Capital are both mortgage REITs, but their lenders don’t see them exactly the same way.

Mortgage REITs use the value of their MBS portfolios to secure short-term loans at relatively low interest rates. When lenders lose confidence in the value of an mREIT’s portfolio, they begin to demand more money as collateral. At the start of COVID-19, Invesco had to drastically cut its dividend and liquidate parts of its portfolio to satisfy lenders. Annaly didn’t come out completely unscathed, but she only lowered her payout by 12% per share and hasn’t budged since.

NLY Dividend Table

NLY Dividend Data by YCharts

The Fed is expected to raise rates again at least twice more this year and then hopefully ease in 2023. If Annaly can weather the storm, investors who buy the falling stock could be rewarded over time. time. A higher interest rate environment should widen the gap between the mortgage-backed securities Anny adds to her portfolio and her cost of capital.

Before you buy this stock, you need to realize that it could fall hard if the Fed continues to turn the screw in 2023. If that’s a risk you’re willing to take, make this stock a small part of a a well-diversified portfolio probably isn’t a bad idea.

Cory Renauer has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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