Annaly's Dividend X-ray

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Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.

The company we're looking at today is Annaly Capital Management (NYS: NLY) , which currently yields 14.9%.

Industry
Annaly, along with competitors including Chimera Investments (NYS: CIM) and Armour Residential (NYS: ARR) , is a mortgage REIT that takes on short-term debt to fund large holdings of mortgage-backed securities. The financial crisis of 2009 was actually good for the industry in that a lot of money left the sector, providing opportunities for the strongest players to continue to operate. As such, over the past few years, the industry has been reaping money as short-term rates are very low and long-term rates have been significantly higher. Recently, however, shares have taken a hit as the Federal Reserve has begun taking steps to reduce long-term interest rates.

Annaly Capital Management Total Return Price Chart

Annaly Capital Management Total Return Price Chart by YCharts

Dividend
To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and if so, how much it has grown.

Annaly Capital Management Dividend Chart

Annaly Capital Management Dividend Chart by YCharts

Annaly's dividend rose steadily from 2007 to 2010 before dropping this year, for a five-year average growth rate of 39.2%.

Sustainability
For a mortgage REIT, the most important measure to follow is a company's interest rate spread. This is the difference between the rate at which the company borrows money and the rate at which it lends out money.

anImage

Source: S&P Capital IQ.

Annaly's interest rate spread, while declining, is still very high and will likely remain so until interest rates begin rising again. As the Federal Reserve has stated that it won't raise rates until 2013 at the earliest, you have some time before this will happen.

Alternatives

anImage

Source: S&P Capital IQ.

There are some alternatives out there in the industry. Invesco Mortgage Capital's (NYS: IVR) trailing yield of 25.5% trounces Annaly's, but its payouts won't likely be as high going forward. Invesco's interest rate spread has been dropping steadily. Last quarter it was 2.75%, and a year ago it was 4.11%. American Capital Agency (NAS: AGNC) looks interesting with its similar interest rate spread and high trailing yield. The company has consistently paid a $1.40 quarterly dividend for more than two years now, though at some point that may go down with interest spreads falling. CYS Investments (NYS: CYS) rounds out the group with a 17% trailing yield, though its interest rate spread is the lowest.

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At the time this article was published Follow Dan Dzombak on Twitter at @DanDzombak to check out his musings and see what articles he finds interesting. The Motley Fool owns shares of Annaly Capital Management and Chimera Investment. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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