Western Asset Mortgage Capital Corp (WMC), Annaly Capital Management, Inc. (NLY): Sustainable Dividends From This 20.6% Yielding mREIT

Published on June 12, 2013 at 5:06 pm by The Motley Fool in News

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Competition

Annaly Capital Management, Inc. (NYSE:NLY) and American Capital Management are among the companies that compete with Western Asset Mortgage Capital Corp (NYSE:WMC). Annaly Capital Management, Inc. (NYSE:NLY) is currently yielding 13.4% on its quarterly dividend rate of $0.45 per share. I am fairly confident that the company will be able to maintain its current dividend rate. That’s because its full year 2012 cash dividend ratio comes out to be 3.5 times. Besides, the company will benefit from an increasing interest rate environment as it estimates a 17% increase in its net interest rate spread if the rate go up 50 bps. Therefore, increased interest income coupled with more than sufficient cash generation ensure dividend sustainability.

For American Capital Agency Corp. (NASDAQ:AGNC), the situation is different. While the stock is yielding 19.6% on its quarterly dividend rate of $1.25 per share, its future dividends are in danger, and a dividend cut cannot be ruled out. It’s full year 2012 cash dividend coverage ratio comes out to be only 1.2 times. Further, the company estimates a 5% decline in its net interest income of the coming quarter if interest rates climb 50 bps. Keep in mind the Agency MBS spread has already widened 18 bps. Therefore, it is evident that American Capital Agency’s dividends are in danger.

Foolish Takeaways

The sustainability of a 20% dividend yield seems unintuitive in isolation. However, the aforementioned analysis reveals that Western Asset Mortgage’s dividend rate is sustainable, given the prevailing macroeconomic situation. Similarly, it is highly likely that Annaly Capital Management, Inc. (NYSE:NLY) will be able to maintain its current dividend rate.

The article Sustainable Dividends From This 20.6% Yielding mREIT originally appeared on Fool.com and is written by Adnan Khan.

Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.