This Nearly 13%-Yielding Dividend Looks Safe for 2024
Annaly Capital Management (NYSE: NLY) pays a whopping dividend. At its current payment rate, its forward dividend yield is approaching 13%. That's nearly 10 times higher than the S&P 500's dividend yield of slightly more than 1.3% over the past 12 months.
The biggest question surrounding the mortgage REIT's dividend is how long it can sustain its payout. While Annaly's earnings suggest its dividend is at risk of another reduction, the company's management team believes it set the dividend at an appropriate level for this year.
Walking a tightrope
Annaly's earnings available for distribution came in at $0.64 per share during the first quarter. That was just below its $0.65 dividend payment. It marked the continued deterioration in the company's earnings, which have fallen from $0.81 per share in the year-ago period to the mid-$0.60 range over the past few quarters.
Unfortunately, things haven't gotten any better in the second quarter. CEO David Finkelstein stated on the company's first-quarter conference call that "as the second quarter has unfolded, continued strong economic data coupled with stalled progress on disinflation has driven a further repricing of forward rate expectations, as well as an increase in volatility." That caused the market to take a more risk-off posture, which the REIT followed by lowering its leverage ratio to its lowest level of the current cycle.
Unless market conditions improve materially in the coming weeks, Annaly's earnings will probably remain under pressure in the second quarter. That will leave investors increasingly concerned about the sustainability of its high-yielding dividend.
Set at an appropriate level
Annaly's CEO, David Finkelstein, addressed the dividend concerns head-on during the first-quarter call. "Notwithstanding lower leverage, the prevailing return environment gives us confidence in the durability of the portfolio earnings profile," he said. Therefore, "We believe that our current dividend is appropriately set for 2024, given our expectations for earnings this year."
The company highlighted in an investor presentation that the current illustrative market levered returns for mortgage servicing rights (MSR) have increased from the 10%-12% range it saw at the end of last year to 12%-14% at the end of the first quarter. Add that to the strong returns it can earn from agency and residential credit investments -- 14%-16% and 12%-15%, respectively -- and the REIT believes it can generate solid earnings this year even at a lower leverage level.
The CEO noted on the call that since its earnings available for distribution will ebb and flow each quarter, it focuses on the economic earnings power of the portfolio. The company believes it can still generate competitive yields and durable earnings even at a lower leverage ratio. As a result, he said, "we do feel quite good about covering" the dividend and its earnings picture this year as long as there's no shock to the market.
While the dividend looks safe for now, its long-term sustainability remains questionable. Annaly cut its quarterly dividend from $0.88 per share to its current level of $0.65 to better align the payout with the returns its portfolio could earn at the time. That was the latest in a series of reductions it has made over the years. Given that history and the ever-present potential of a market shock, investors can't bank on seeing Annaly maintain its current dividend rate. Unless its earnings start rising, the company might need to reset its dividend again.
Safe for now
Annaly believes its portfolio can generate the returns needed to cover its big-time dividend this year, barring a market shock. However, the longer-term sustainability of its payout remains questionable. It's not the best option for investors seeking a bankable passive income stream.
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Matt DiLallo has positions in Annaly Capital Management. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
