This ultra-high-yielding dividend stock fought headwinds and came out on top

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

With that higher yield comes more risk. O mortgage real estate investment trust (REIT) uses a lot of leverage to invest in mortgage-backed securities (MBS) supported by government agencies such as Fannie Mae. While this leverage can increase your returns, it also increases your volatility. This last issue has caused the REIT to cut its dividends in the past. However, it successfully navigated more challenging market conditions in the second quarter, which should, for now, alleviate concerns about another dividend cut.

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 your current dividend payment of $0.65 per share. This It was also an improvement since the first quarter, when EAD fell to $0.64 per share, putting it below the dividend level.

The REIT’s EAD improvement was impressive considering the challenges he faced in the quarter. CEO David Finkelstein said on the second-quarter conference call that the company “saw a lot of volatility” in the period. He noted that interest rates rose modestly in the quarter, as April’s economic data caused the market to temper its expectations for rate cuts this year. As a result, MBS Agency spreads expanded during this period.

Despite this challenging environment, Annaly delivered an economic return of approximately 1% in the quarter and 5.7% during the first half of the year. This performance “demonstrates[ed] the strength of our housing finance model,” commented the CEO in the earnings press release. He has delivered solid earnings and returns while maintaining a prudent attitude leverage ratio of 5.8 times. This strong financial position allowed the company to opportunistically grow its agency MBS portfolio in the quarter to capitalize on attractive spread levels.

Better days could lie forward

Although the second quarter was more challenging, Annaly sees signs that market conditions could improve in the coming quarters. Finkelstein noted on the second quarter conference call that economic activity has gradually slowed as high interest rates begin to affect more parts of the economy. Furthermore, although inflation remains high, recent data showed that shelter-related inflation is “finally starting to slow down.” Add in a more balanced job market and there is a growing belief that a short-term rate cut by the Federal Reserve is increasingly likely.

The story continues

Moderation in interest rate volatility and more accommodative monetary policy from the Fed would benefit Annaly. Finkelstein noted on the call that “this should steepen the yield curve, reduce volatility and ultimately, in our view, lead to superior agency performance.”

The company believes its current capital allocation and portfolio construction positions it “to generate sustainable returns in an environment that should be favorable to fixed income investors,” the CEO said. Furthermore, the REIT has a lot of liquidity, which will allow you to grow your portfolio opportunistically.

This outlook bodes well for the company’s ability to maintain its large dividends. Payment sustainability has been an issue for Annaly in the past. You cut your payment by 26.1% in early 2023 due to an expected drop in your EAD, which is what happened. It also reduced its dividends in 2020 and 2019.

Annaly’s dividend appears safe for now. However, the company’s history of cuts and the potential for renewed volatility in the future mean investors may not be able to bet on it. to sustain your dividend forever.

A solid showing

Annaly Capital Management delivered solid results in the second quarter, especially in light of challenging market conditions. Because of this and your growing optimism about what’s to comethe company’s large dividend appears safe for now. However, with a history of dividend cuts (and a high payout ratio), it’s not the most profitable dividend. Given its risks, income-seeking investors may want to look elsewhere for a more sustainable income stream.

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Matt DiLallo 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 disclosure policy.

This ultra-high-yielding dividend stock fought headwinds and came out on top was originally published by The Motley Fool