Annaly Capital Management's PFD SER G: A High-Yield Preferred Dividend Play in a Shifting Rate Environment

In an era of volatile interest rates and uncertain economic signals, income-focused investors are increasingly turning to preferred stocks as a hedge against inflation and a source of stable returns. Among the most compelling opportunities is Annaly Capital Management's 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (NLY.PRG). This instrument, with its unique structure and robust yield, offers a rare blend of income security and capital preservation in a market where traditional fixed-income assets are losing their luster.

The Yield Attraction: A Dual-Phase Dividend Strategy

NLY.PRG's appeal lies in its dual-phase dividend mechanism. Until March 31, 2023, the stock paid a fixed dividend of 6.50% annually, a rate that, while modest by today's standards, provided predictable income. However, the transition to a floating rate post-2023 has transformed its yield profile. The current dividend, declared at $0.557700 per share for the third quarter of 2025, equates to an annualized yield of 8.72%. This rate is calculated using the three-month CME Term SOFR plus a spread adjustment of 0.26161% and an additional 4.172% spread.

The floating-rate structure ensures that the stock's yield remains competitive even as central banks adjust policy. For instance, if SOFR rises in response to inflationary pressures, NLY.PRG's dividend will automatically increase, preserving its attractiveness. This adaptability is a critical advantage in a shifting rate environment, where fixed-rate instruments risk becoming unattractive as benchmark rates climb.

Credit Risk and Capital Resilience

A key concern for preferred stock investors is credit risk. Annaly Capital Management, a real estate investment trust (REIT), operates in the mortgage finance sector, a space inherently sensitive to interest rate fluctuations and credit cycles. However, the company's financial metrics suggest a strong capacity to meet its obligations.

As of June 30, 2025, Annaly reported a GAAP capital ratio of 12.0% and an economic capital ratio of 14.8%, both of which indicate a robust equity cushion. Its leverage ratios—GAAP at 7.1x and economic at 5.8x—are within prudent limits, especially given its hedging strategy. The company maintains a hedge ratio of 92%, shielding its portfolio from adverse interest rate movements. This defensive posture reduces the likelihood of earnings compression, which could otherwise threaten dividend payments.

Moreover, Annaly's earnings available for distribution (EAD) stood at $0.73 per average common share in Q2 2025, underscoring its ability to sustain both common and preferred dividends. The company's diversified mortgage finance portfolio, including agency securities, residential credit, and mortgage servicing rights, further insulates it from sector-specific shocks.

Market Price and Valuation

NLY.PRG currently trades at $25.33 per share, a 1.32% premium to its $25.00 liquidation preference. While this premium may seem modest, it reflects investor confidence in Annaly's ability to deliver consistent dividends. The stock's 52-week range of $23.01 to $25.75 suggests limited volatility, a trait typical of preferred securities.

The forward dividend yield of 8.72% and trailing yield of 9.08% position NLY.PRG as one of the more attractive preferred stocks in the market. For comparison, the average yield on investment-grade preferred shares in the REIT sector hovers around 6.5–7.5%. This premium yield is justified by Annaly's strong capital position and its ability to pass through interest rate hikes to shareholders via the floating-rate mechanism.

Strategic Considerations for Investors

While NLY.PRG offers compelling returns, investors must weigh several factors. First, the stock is perpetual, meaning it has no maturity date, and its floating-rate structure could lead to yield compression if SOFR declines. However, given the current trajectory of interest rates—still elevated by historical standards—this risk appears distant.

Second, the lack of a credit rating for the Series G shares introduces some ambiguity. Investors should rely on Annaly's financial disclosures, including its leverage ratios and hedging practices, to assess creditworthiness. The company's recent $761 million equity raise further strengthens its balance sheet, reducing the likelihood of a dividend cut.

Finally, the stock's callability—originally set for March 31, 2023—means Annaly could redeem the shares if it becomes advantageous. However, the company has not exercised this option, likely due to the high cost of refinancing in a rising rate environment. This inaction suggests a long-term commitment to the preferred stock's dividend structure.

Conclusion: A Prudent Income Play

In a world where bond yields are volatile and equity dividends are uncertain, Annaly's PFD SER G stands out as a disciplined income opportunity. Its floating-rate design, coupled with the company's strong capital position and hedging strategy, makes it well-suited for a shifting rate environment. While not without risks, the stock's 8.72% yield and defensive characteristics justify its place in a diversified income portfolio.

For investors seeking to balance yield with stability, NLY.PRG offers a compelling case. However, as with all preferred stocks, it should be held as part of a broader strategy that accounts for liquidity needs and macroeconomic trends. In the current climate, where central banks remain cautious and inflationary pressures persist, Annaly's Series G Preferred Stock is a rare gem worth considering.