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 yields 13.6%.

Most real estate companies, including Annaly, are organized as real estate investment trusts, or REITs. They do this so that they can get around the double taxation issue that most investors face. REITs don't pay taxes as long as they distribute at least 90% of their income as dividends. The investor holding shares of the REIT then has to pay taxes on those dividends as though they are income. This differs from most dividends, which are taxed at a lower rate.

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 has it grown.

Annaly's dividend rose steadily from 2007 to 2009, where it hit a high of $0.75 in December 2009. Since then, the dividend has been slowly dropping and most recently was $0.57.

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 that the company borrows money at and the rate that it lends money out at.

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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 2014 at the earliest, you have some time before this will happen.

Another tool for better investing
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At the time this article was published Dan Dzombak can be found on his Facebook page. Click here and like his Facebook page to follow his investing articles. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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