Annaly Capital Management (NLY) has experienced a peak in its dividend yield and starting the fourth quarter of 2012 had to lower its dividend. I do not believe this is a long term trend because the economy is slowly starting to regain ground and I am finding that most REITs like Annaly are diversifying away from the Feds. I believe a lower dividend rate will find a bottom soon but still remains high compared to most companies out there. I believe REITs will continue to be an attractive investment for income investors. Let's take a look at what is happening with NLY.
Changes in Dividends
After Annaly Capital recorded its fourth quarter earnings topped estimates because of higher-than-expected realized gains, analysts at Nomura decided to pour cold water on hopes of many investors by taking the position that the company's dividends are unsustainable. Why did they take this position? They said:
"Our analysis suggests that the dividend is not sustainable based on spread income alone, we estimate that NLY's quarterly dividend capacity stands at ~$0.30 per share based on this quarter's results."
What does this mean for investors, considering most investors are in REITs for income reasons? Having to pay back 90% of their profits, REITs have offered extremely attractive dividends over the last few years. When I think about investing in a REIT, I think of investing for income. Since this is the case most investors would be in a buy and hold long term position. NLY tends to invest in long-term fixed mortgages and logic would tell me that the two work well together hand-in-hand taking their long-term position and also a long-term position of the investor. Maybe interest rates are sustainable for many REITs and some could be more then NLY presently but an investor needs to ask themselves the question: "Is the REIT I am looking at thinking long-term or looking to make a quick buck?"
As the Fed's continue to acquire home loan bonds intended to push down home loan costs, REITs struggle at the Fed's attempt stimulate the economy while bond yields tighten. This has an adverse effect upon the profits of REITs. NLY, which oversees about $133 billion in assets, and a large portion of that being government back residential securities, has caused the company to struggle fourth quarter of its fiscal year as it lost 17%. This was the most of any REIT tracked by Bloomberg.
But as the economy has slowly been inching its way up into recovery many REITs are also recovering including Annaly Capital. It has gained 8% since the beginning of the year is strategically changing the way it does business. In a move to be less dependent upon the influence the Fed's, the company bought Crexus Investment Corporation, a commercial mortgage investor. This allows NLY to broaden its business and move into less competitively bid assets. This is a good strategic move by the company but also may signal that the highest dividend payouts may be a thing of the past for many REITs as NLY continues to try to stay ahead of the curve.
As the feds spend billions on mortgage bonds, many homeowners are purchasing or refinancing causing REITs to reinvest at lesser yields. The results of this for investors will be lower dividends through most REITs. But, with interest rates rising the worst may be behind. Even though we may see another quarter or two of lower dividends, we might experience a sustainable level by year's end if the economy continues to inch its way up.
The stock presently looks like it's in a very strong bullish trend pattern. When I look at the Bollinger bands the stock is using the middle band for support and this is about the second strongest type of trend that I can see. The RSI indicator highlights this as it remains above the 50 line and when it peaks, it just touches the over bought position but doesn't push up far enough that is a huge pullback. After the same manner, the MACD indicator is at a very healthy level far above the zero line moving sideways deep in bullish territory. I don't believe the stock is done moving up.
Annaly Capital Management will continue to be a good investment and dividends will continue to be attractive for income investors because they will remain higher than most companies offering dividends. The company thinks long-term and invests long-term and I believe lowering dividend rates will not last more than two or three more quarters. I do not think the lower rates would be that significant. The company will find a bottom and as it continues to diversify away from the fed's mortgage bond investments, it will continue to attract income investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.