Don’t Get Trapped by a 14% Yield

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Last week, the topic of my weekly YouTube video series, State of the Market, was stocks whose yields are too high.

(By the way, it’s absolutely free to subscribe to State of the Market. With a click of your mouse, you’ll never miss a video on making or saving money.)

Annaly Capital Management (NYSE: NLY) was one of the companies that I used as an example of having an overinflated dividend.

Annaly yields more than 14%, so it’s natural that it’s an often-requested stock here at Safety Net.

First, the good news: Annaly makes more money than it pays out in dividends, and it is expected to do so again in 2022.

Last year, the mortgage real estate investment trust (REIT) generated $1.73 billion in net interest income (NII) while paying out $1.36 billion in dividends. NII is the difference between what a mortgage REIT collects in mortgage payments and what it pays in borrowing costs, after expenses are subtracted.

For 2022, NII is forecast to decline to $1.58 billion, while dividends paid is expected to stay relatively flat at $1.37 billion. So NII will still cover the dividend if those numbers are met, but NII is going the wrong way, which is not good.

Annaly is what’s known as a yield trap.

It sucks investors in with its high yield and then slashes the dividend, at which point, its stock price craters.

A 14% dividend yield is great, but not when it turns into a 7% yield over time and you lose a third of the value of your investment in a year.

That’s exactly what has happened with Annaly, which is down 34% over the past year.

Annaly has cut its dividend 10 times since 2011.

Chart: Annaly's Quarterly Dividend Has Been Falling for a Decade
Annaly is what’s known as a serial dividend cutter. It will lower the dividend again at some point. Just a cursory glance at the graph above shows you what direction the dividend is going. Often, when a company reduces its dividend, the stock price suffers as well.

If you own Annaly, expect another dividend cut within the next year or two.

Dividend Safety Rating: F

Dividend Grade Guide
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Good investing,


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