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

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.

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