The 19% dividend yield is at risk

Annaly Capital (NYSE: NLY) stock price has been in a downward trend this year. It crashed to a low of $17.50 on Monday, the lowest point since November 2022. In all, the high-yielding dividend stock has dropped by over 22% from the highest point this year. This means that it has moved to a bear market.

Is the dividend at risk?

Annaly Capital is a leading Real Estate Investment Trust (REIT) valued at over $9 billion. The company operates is business through three key divisions: agency, mortgage servicing rights, and residential credit. In all, it manages assets worth over $81 billion.

Annaly is beloved for its elevated dividend payouts to shareholders. Data compiled by SeekingAlpha shows that it has a dividend yield of 19.04%, which makes it bigger than inflation and the short and long-term bond yields. Its four-year dividend yield stands at about 13.50%.

However, the company’s investors face significant risks going forward as interest rates remain at an elevated level and as mortgage-backed security (MBS) security spreads widens. Most importantly, as I wrote in this article, dividend stocks are now competing with cash. In fact, extremely short-term treasury notes are yielding above 4%. 

Worse, Annaly warned that it will cut its dividend this quarter. This is important since most people who invest in Annaly – and other REITs – do so because of their regular distributions. In the earnings statement, the CEO said:

“As a result, subject to determination by our Board, we expect to reduce our quarterly dividend in the first quarter of 2023 to a level closer to Annaly’s historical yield on book value of 11% to 12%.”

For Annaly Capital, Tuesday’s inflation numbers, were bad news since they mean that the Fed tightening will continue. With regional bank stocks rising, and with inflation still stubbornly high, we can’t rule out a situation where the Fed hikes by 0.25% or even 0.50% next week. 

This explains why bond yields have risen, which will see the 30-10 year Treasury Yield spread continue rising. As shown below, it has moved from the negative area of -0.10% last week to 0.13%.

Annaly Capital stock price forecast

NLY stock chart by TradingView

The daily chart shows that the Annaly Capital share price has pulled back in the past few days. This sell-off culminated in the stock falling below the lower side of the ascending channel shown in black. The 25-day and 50-day moving averages have also made a bearish crossover pattern while the MACD has moved below the neutral point.

While the stock has formed a bullish shooting star candlestick, I suspect that the bearish trend will continue in the coming weeks. If this happens, the next reference level to watch will be at $15, the year-to-date low. This price is about 20% below the current level.