This Ultra-High-Yield Dividend Stock Battled Headwinds and Came Out On Top

[Pelican Press 0]

This is the hidden content, please

• Sign In
• or
• Sign Up

This Ultra-High-Yield Dividend Stock Battled Headwinds and Came Out On Top

Annaly Capital Management (NYSE: NLY) offers investors a tempting dividend yield. At more than 13%, it’s 10 times higher than the S&P 500’s dividend yield.

With that higher yield comes more risk. The

This is the hidden content, please

• Sign In
• or
• Sign Up

uses lots of leverage to invest in mortgage-backed securities (MBS) backed by government agencies like Fannie Mae. While that leverage can boost its returns, it also enhances its volatility. That latter issue has caused the REIT to cut its dividend in the past. However, it successfully navigated more challenging market conditions in the second quarter, which should ease concerns about another dividend cut for now.

Thriving in the face of challenges

Annaly Capital Management generated $0.68 per share of earnings available for distribution (EAD) in the second quarter. That was enough to cover its

This is the hidden content, please

• Sign In
• or
• Sign Up

. It was also an improvement from the first quarter, when EAD fell to $0.64 per share, putting it below the dividend level.

The REIT’s improved EAD was impressive, considering the challenges it faced in the quarter. CEO David Finkelstein stated on the second-quarter conference call that the company “saw a fair amount of volatility” in the *******. He noted that interest rates rose modestly in the quarter as economic data in April caused the market to temper its rate cut expectations this year. As a result, Agency MBS spreads widened during this *******.

Despite this challenging environment, Annaly delivered a roughly 1% economic return in the quarter and 5.7% through the first half of the year. That performance “demonstrate[ed] the strength of our housing finance model,” commented the CEO in the earnings press release. It delivered those solid earnings and returns while maintaining a prudent leverage ratio of 5.8 times. That strong financial position enabled the company to opportunistically add to its Agency MBS portfolio in the quarter to capitalize on the attractive spread levels.

Better days could lie ahead

While the second quarter was more challenging, Annaly sees signs that market conditions could improve in the coming quarters. Finkelstein noted on the second-quarter call that economic activity has gradually slowed as high interest rates begin affecting more parts of the economy. Further, while inflation ******** elevated, recent data showed shelter-related inflation is “finally starting to soften.” Add in a more balanced labor market, and there’s a growing belief that a near-term rate cut by the Federal Reserve is increasingly likely.

Story continues

Moderating interest rate volatility and a more accommodative monetary policy by the Fed would benefit Annally. Finkelstein noted on the call that “this should steepen the yield curve, reduce volatility, and ultimately, in our view, lead to agency outperformance.”

The company believes its current capital allocation and portfolio construction position it “to generate sustainable returns in an environment that should be favorable to fixed-income investors,” stated the CEO. On top of that, the REIT has lots of liquidity, which will enable it to grow its portfolio opportunistically.

That

This is the hidden content, please

• Sign In
• or
• Sign Up

bodes well for the company’s ability to maintain its big-time dividend. Payout sustainability has been a problem for Annaly in the past. It cut its payout by 26.1% in early 2023 due to an expected decline in its EAD, which is what occurred. It also reduced its dividend in 2020 and 2019.

Annaly’s dividend seems safe for now. However, the company’s history of cuts and the potential for renewed volatility in the future mean that investors might not be able to bank on it sustaining its dividend forever.

A solid showing

Annaly Capital Management delivered solid second-quarter results, especially in light of the challenging market conditions. Because of that and its growing optimism for what’s ahead, the company’s big-time dividend seems safe for now. However, with a history of dividend cuts (and a high payout ratio), it’s not the most bankable dividend. Given its risks, income-seeking investors might want to look elsewhere for a more sustainable income stream.

Should you invest $1,000 in Annaly Capital Management right now?

Before you buy stock in Annaly Capital Management, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 

This is the hidden content, please

• Sign In
• or
• Sign Up

for investors to buy now… and Annaly Capital Management wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $692,784!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

This is the hidden content, please

• Sign In
• or
• Sign Up

*Stock Advisor returns as of July 22, 2024

This is the hidden content, please

• Sign In
• or
• Sign Up

has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a

This is the hidden content, please

• Sign In
• or
• Sign Up

.

This is the hidden content, please

• Sign In
• or
• Sign Up

was originally published by The Motley Fool

This is the hidden content, please

• Sign In
• or
• Sign Up

#UltraHighYield #Dividend #Stock #Battled #Headwinds #Top

This is the hidden content, please

• Sign In
• or
• Sign Up

This is the hidden content, please

• Sign In
• or
• Sign Up