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Few stocks incite the strong emotions from Seeking Alpha readers that Annaly Capital (NYSE:NLY) does.

Income investors are down to fewer and fewer choices in today's near-zero interest rate world. They want to feel safe holding one of the few stocks that still yields a double-return based strictly on its quarterly distributions.

Based on that criteria, NLY looks like an oasis in the ZIRP desert. At last week's close of $16.50 NLY showed a current yield of 12.12%.

Distributions have been coming down due to compressing spreads between the cost of funds and mortgage backed yields.

Since Q4 2009 the payout has declined by 33.3% (from $0.75 quarterly to $0.50 at present).

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Since late 2008 30-year fixed rate mortgages have dropped drastically (from almost 6.5% to 3.36%) putting a huge squeeze on the profit margins of mREITs like NLY.

The Federal Reserve's recent announcement that they will soon be buying huge amounts of mortgage-backed securities each month means that these rates are likely to keep coming down simply due to this new source of extra demand.

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Older mortgage-backed paper was marked up over the past four years as rates dropped relentlessly lower. mREITs were able to book gains from sales of older inventory but at the cost of lower future income streams.

NLY shares have declined in price over the past three years if you exclude the dividends received. The chart below is taken directly from NLY's own website. The historical price data from Yahoo Finance confirms exactly what NLY reported.

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Annaly's fans will point out that including the distributions they showed positive returns for those three years ($7.44 - $1.31 = $6.13 / $17.87 = 34.89% = 11.63% annualized). That is correct.

That was achieved while rates went down continuously to all-time low levels. This is mathematically impossible to be duplicated going forward.

The juicy distributions were fully taxable along the way. That means investors over the past three years have paid up for the privilege of holding shares that now show long-term capital losses (on paper) since October 2009.

Knowing if your return was truly a good one requires benchmarking it to the overall market. How did the broad market do over that same 36 months?

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The total return on the S & P 500 ETF (NYSEARCA:SPY) for the same 3-year period was 47.35% ($42.12 + $7.133 = $49.253 / $104.02 = 47.35% = 15.78% annualized).

Those who focused on total return rather than simply 'income' garnered 4.15% per year more than NLY's 11.63% while receiving better tax treatment.

Holders of the SPY got qualified dividends (15% maximum federal tax rates) and are sitting on unrealized long-term capital gains which still qualify for favorable tax rates if anyone cares to lock in profits.

NLY bulls love to point out their longer-term returns. Here is the truth regarding their decade-long price action.

Excluding dividends NLY shares went nowhere during 10 years of one the greatest period ever for mortgage-backed securities. Compare that to what the SPY returned during those same years.

Note: I had to use Oct. 4 of each year for the 10-year comparison as Oct. 5, 2002 was not a trading day.

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The SPY ETF gained 80.85% during that decade while earning cumulative dividends of $14.10 or 17.45% for a total return of 98.3%.

Nobody can say for sure what the future holds.

What is known is that mortgage rates have never been lower and that they have little absolute room left to fall.

We also can be pretty certain that Federal reserve intervention is already priced in to today's prices. This meddling can't last forever.

The golden age of all bond markets has probably run its course after descending from the heights of 1980's mid-teens coupon rates.

Who are the major owners of NLY today?

· Index funds

· ETFs specializing in REITs

· Income-oriented Mutual Funds

· Yield-Starved Individual Investors

When interest rates tick up again, as they will do some point in the future, all four of those investor categories will be rushing for the door at the same time.

NLY did not perform brilliantly in the best of all possible environments. It is likely to do worse when the macro-environment turns negative.

Source: Annaly Capital Management - Love It Or Hate It?